More Real Estate Transactions Now Subject to National Security Review

Created in 1988, the federal Committee on Foreign Investment in the United States, or CFIUS, reviews acquisitions of US-based assets by foreigners for potential national security implications. Using CFIUS's findings, the President can then block a transaction, place conditions on a transaction, or undo a completed transaction if it is determined harmful to national security. CFIUS review made headlines in 2012 when President Obama blocked the acquisition by a Chinese company of a wind energy project near US Navy facilities in Oregon. More recently, in March President Trump blocked acquisition of Qualcomm Inc. by a Singaporean company with ties to China, citing national security concerns regarding Qualcomm's involvement in developing 5G wireless technology.

Historically, CFIUS review was limited to foreign acquisitions of US industries and technologies and resulted in about 1,500 reviews per year. In August 2018, however, Congress passed and the President signed the Foreign Investment Risk Review Modernization Act of 2018, expanding the scope of transactions subject to CFIUS review. Specific to real estate, CFIUS review now applies to any real estate to be acquired by a foreign buyer that is: (1) part of a port, (2) near a military installation or other sensitive government facility, or (3) could reasonably provide foreign persons the ability to collect intelligence on, or expose, national security activities. The new act contains exemptions for transactions involving single-family housing or in urbanized areas, but the exemptions are only partial – if a transaction is particularly sensitive from a national security perspective, the exemptions may not apply. The act also expands CFIUS review to any investment in a US business that maintains or collects sensitive personal data on US citizens.

In November, the Treasury Department issued rules implementing the 2018 Act, which reveal Treasury's intent to apply the new law as broadly as possible. Twenty-seven industries have been identified as "critical technology" industries, requiring all acquisitions by foreign persons in those industries to be reported to CFIUS. The previous reporting threshold required that the transaction involve 10% or more of the target company; now any foreign transaction must be reported to CFIUS regardless of size or percentage control. Starting in 2020, parties seeking CFIUS review must pay a filing fee equal to the lesser of 1% of the transaction value or $300,000. The penalty for failing to report used to be the risk that the transaction would be unwound; now, failure to report can also result in hefty fines up to the full value of the transaction. Under the new rules, observers expect reviews to increase by 20% or more.

Real estate owners and investors selling or leasing real property that meets one of the three requirements above, or that implicates one of the 27 critical industries, need to pay greater attention to the possibility that a CFIUS filing is required. The third requirement applying CFIUS to real estate transactions that "could reasonably provide foreign persons the ability to collect intelligence on, or expose, national security activities" is a bit of a catch-all, so in close cases one should probably err on the side of caution and report the transaction. Also, landlords and property managers owned or controlled by foreign persons or entities must consider whether CFIUS review is required when taking rental applications that may contain sensitive personal data (such as when a government agency or contractor is the applicant). When CFIUS review is required, a transaction could be delayed by 90 days or more.