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Real estate investors and theircounsel who were worried about the slew of new rules for foreign investment inreal estate in the United States may be relieved that thefinalregulations, which takeeffect today, came in more narrowly drafted than some hadfeared.

Ama Adams, a partner at Ropes & Gray in its anti-corruption and international risksgroup, said, "CFIUS is new for real estate investment managementfirms who may be bringing on foreign investors. We have had a lotof calls [from clients] trying to understand what that means fortheir business or investment activities now."

The regulations, which wereenacted under the Foreign Investment Risk Review Modernization Actof 2018 (FIRRMA), expanded the scope of investment transactionsrequiring a mandatory filing for review by the Committee onForeign Investment in the U.S. (CFIUS), the interagency panelat the Treasury Department. They also introduced a stiff penaltyfor failing to file a mandatory notice for an investment thatrequires one. The penalty can be up to and including the value ofthe investment. 

But real estate reviews underCFIUS, while broader than before, remain voluntary under the newrules, the lawyers said.

The U.S. Treasury Departmentregulations also "whitelisted" the United Kingdom, Australia, andCanada as countries whose investments are generallyexcepted from the requirement for national securityreviews of covered transactions involving non-controllinginvestments, because regulators decided that those countries haveregulations that are similar to the UnitedStates. The rules as drafted leave the door open for othercountries to join the excepted list, or for excepted countries todrop off the list, depending on their actions. 

But while the TreasuryDepartment has whittled down some of the final regulations from theinitial proposals, there is still potentialfor unpleasant surprises for real estate investorsunder 31 C.F.R. Part802, the 31 pages of final rules governing real estate transactionsunder FIRRMA, lawyers warn. 

For example, while real estatereviews aren't mandatory, parties could still be required to submitto a review by the CFIUS panel if the parties don't filevoluntarily and the committee finds a reason to scrutinize thedeal, said Les Carnegie, co-lead of the CFIUS and U.S. nationalsecurity practice group at Latham &Watkins, and associateLauren Talerman. The panel could even recommend that the U.S.president order the deal unwound.

That happened in 2012 underprevious CFIUS regulations when President Barack Obama orderedRalls Corp. to divest its acquisition of a wind farm project inproximity to a Defense Department installation in Oregon, whichresulted in the only CFIUS lawsuit in history. It ultimately endedin a 2015 settlement. 

So foreign companies, and U.S.companies with foreign investors in real estate transactions thatpotentially could be covered by the new rules, need to payattention.

"It is not a mandatory filingrequirement, but the CFIUS considerations should absolutely be partof the purchase or lease checklist," Carnegie said. Following arefive takeaways from CFIUS lawyers:

1. A foreign companydoesn't need to acquire a U.S. company to be covered by the newrules for CFIUS review of a real estatetransaction.  FIRRMA expanded CFIUS's jurisdiction to includetransactions involving "foreign persons" in any purchase, lease, orconcession of real estate, including real estate investment trusts(REITs), regardless of whether a U.S. business isinvolved.

"Historically, the real estatetransactions were only subject to jurisdiction where they could besubject to control by a foreign person over a U.S. business," Adamssaid. "Now, you don't need an acquisition of a U.S. business. Itcould be the purchase or lease of property."

The new rules taking effect todayare intentionally much broader than earlier regulations and eveninclude the purchase of barren land. "Purchase of land may besubject to jurisdiction if proximity rules apply," Carnegiesaid.

2. The panel can review only deals thatgive investors three of four propertyrights.  Theyare: (1) the right to physical access to the property; (2) the right to exclude others from physically accessingit;  (3) the right to improve or develop the property;and  (4) the right to affix structures or objects to it.For that reason, one way to deal with the new rules may be to limitforeign investors' property rights in a transaction.

3. For the first time, the Treasury Department isproviding investors with definitions around close proximity andextended range.  The new regulations contain a lot of specificrules covering proximity to military and other sensitive governmentinstallations, as well as maritime ports and airports, but CFIUShas said the public can use a web-based tool at the Census Bureaucalled TIGERweb.geo.census.gov until theTreasury Department comes up with its own interactive tools, whichare planned.

"These new real estate rules andapplications are difficult to apply," Carnegie said. "You have tohave a good understanding of the map, which is where this new toolthat the government is developing may be helpful to the public. Theother thing is that once you are caught from the map, you have tofigure out whether you are released from the jurisdiction, likesingle-family housing or office space, or an urbanized area asdefined by the regulations. The overlap of the map and theseexceptions is something the regulated community is going to finddifficult at first."

4. There are fairly broad exceptions under the newrules for single-family housing units and commercial officespace.  Latham's Talerman also emphasizedthat the real estate rules are a "catch and release," being caughtby the map or released by the rules with respect to single-familyhomes, urbanized clusters, and other exceptions.

5. It remains to be seen whether the D.C. metro areaand other parts of the country with dense concentrations ofgovernment and military facilities will be more affectedby the new real estate rules, despite the exceptions for "urbanclusters" and "urbanized areas" in theregulations.  "We really don't know, but it is definitely avalid point, because of the nature of this area and where thefederal government is located. You are going to find a lot ofsensitive government installations sprinkled throughout the D.C.metro area," said Adams.

As a general bit of guidance,Adams said general and in-house counsel "should be assessing thetypes of real estate transactions they are engaging in, and if theyare subject to the new rules and national security issues, and makesure that certain property rights are not automatically afforded topeople, but make sure that giving them rights doesn't raise a CFIUSissue and front-load those discussions. If they want those rights,they have to do more due diligence around those issues. Get salesand marketing teams to understand that this is another issue theyneed to be thinking about."

Carnegie said counsel for foreign investors should have hadCFIUS very high up on their deal checklist already, and now as aresult of these new rules, "in-house counsel for foreign investorsand foreign companies should have a purchase or even a lease besomething that goes through CFIUS considerations."

From: CorporateCounsel