Foreign investment in U.S. commercial real estate has been robust over the last few years and looks to continue to be strong in 2019. One issue that foreign investors should consider is potential review of a transaction by the Committee on Foreign Investment in the United States (“CFIUS”), which may recommend the President block or modify investments by foreign investors.
CFIUS is a Federal interagency committee authorized to review certain “covered transactions” involving foreign investment in the U.S. that may affect national security. Historically, CFIUS has focused on corporate transactions involving foreign investors - often times, relating to defense or infrastructure - and has, in certain cases, required modifications to transactions or blocked them altogether due to national security concerns. For example, in 2012, the Obama administration ordered a Chinese-owned company to divest its interests in a wind farm project that was being constructed near restricted air space at a U.S. Navy facility in Oregon. Prior to recent changes in the law, most real estate transactions were not deemed to be acquisitions of existing U.S. businesses and were not covered under CFIUS jurisdiction; however, CFIUS reviewed the 2014 acquisition of the Waldorf Astoria in New York by Anbag Insurance Group, a Chinese company, due to Chinese ownership of a hotel frequented by many United States Presidents and diplomats, and ultimately approved the acquisition. The Chinese Government's recent acquisition of Anbag may again subject the transaction to CFIUS review.
In 2018, though, President Trump signed The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which, among other things, expanded the scope of transactions subject to CFIUS jurisdiction to include certain real estate transactions. Under FIRRMA, foreign investment in real estate that is located near a port, airport, military facility or other sensitive government location is subject to CFIUS review. Other real estate transactions that give foreign investors the ability to collect intelligence on activities at nearby facilities or that could otherwise expose national security activities at nearby facilities are also now covered transactions pursuant to FIRRMA.
While FIRRMA now requires mandatory declarations for certain transactions, filing a notice with CFIUS for a real estate transaction is, for the most part, voluntary. Following the filing, CFIUS engages in a review during which it will determine whether the proposed transaction presents national security risks. If parties do not voluntarily file with respect to a particular transaction, CFIUS has the authority to review the transaction at any time, even after closing, and to the extent that national security risks exist, the President has the authority to require modifications or demand the parties unwind the transaction. So it is important for foreign investors, their partners, lenders and counterparties to consult with counsel and consider whether their transaction will trigger national security concerns for CFIUS, and if the parties should file a notice as a preemptive action.