John P. Carlin, Nicholas J. Spiliotes, Joseph A. Benkert, Panagiotis C. Bayz, Charles L. Capito III, and Amy S. Josselyn
National Security, CFIUS, Sanctions + Export Controls, Real Estate, and Real Estate Finance
This is the second in our multipart series of alerts addressing proposed regulations published in the Federal Register on September 24, 2019, for the Committee on Foreign Investment in the United States (CFIUS) to implement the Foreign Investment Risk Review Modernization Act (FIRRMA).
One of FIRRMA’s many noteworthy changes was to expand the types of real estate transactions CFIUS can review beyond those that result in control of a U.S. business, to include leases, concessions, and acquisitions of real estate (developed and undeveloped) in proximity to military and other specified installations. Under the regulations proposed by the U.S. Department of the Treasury (“Treasury”) in 31 C.F.R. Parts 800 and 802, real estate transactions could be subject to CFIUS review in several ways:
Proximity to designated military and government facilities is a key component of whether a transaction is a covered real estate transaction under Part 802. For transactions under Part 800, proximity is not a determinant of whether the transaction is a covered transaction, but will likely continue to be a factor in CFIUS’s risk-based analysis of whether a covered transaction poses national security concerns.
This alert focuses on transactions that would be subject to Part 802 of the proposed CFIUS regulations. Although they would expand the scope of real estate transactions CFIUS can review, these regulations also provide needed clarity for the real estate investment community, and reflect CFIUS’s efforts to narrow the scope of its review to transactions that could present national security concerns.
The major takeaways from the proposed CFIUS real estate regulations are:
What Is a Covered Real Estate Transaction?
Whether the new regulations in Part 802 will apply to a particular transaction involving real estate in the United States is determined by the following definitions and analysis:
Which Real Estate Transactions Are Not Covered by the Proposed Regulations?
A real estate transaction is not subject to the proposed CFIUS regulations in Part 802 if it is not a “covered real estate transaction” as defined above, or if it is an “excepted real estate transaction.”
In addition to transactions that do not meet the proximity or property rights criteria of the “covered real estate transaction” definition, the following types of transactions also are not covered real estate transactions under Part 802:
“Excepted real estate transactions” include:
Several of these exceptions provide meaningful relief for both real estate investors and foreign businesses acquiring real estate for operations in the United States. For example, the exception for transactions in urbanized areas and urban clusters will provide clarity for certain real estate transactions that would otherwise be covered by Part 802 because of their proximity to military or sensitive facilities near urban areas. In addition, excepted transactions involving single housing units and smaller-scale interests in commercial office space will exclude routine commercial transactions from the jurisdictional reach of Part 802.
As noted, however, it is still necessary to evaluate a real estate transaction for potential national security concerns subject to CFIUS’s jurisdiction under its other regulatory authorities (e.g., an acquisition of control by a foreign person over a U.S. business). CFIUS may also assert jurisdiction over transactions that are designed to evade or circumvent CFIUS jurisdiction.
Opportunity for Public Comment
The proposed rules are not yet in effect; rather, they are open for public comment through October 17, 2019. Senior Treasury officials hosted a public teleconference briefing on Part 802 on September 27, 2019, to provide an overview of the proposed real estate rules and answer questions. This alert takes into account the information provided in the Treasury briefing. After the “notice and comment” period, Treasury will develop and publish final rules expected to take effect by February 2020.
MoFo will publish additional articles providing deeper dives and practical guidance for clients on other key subjects in the proposed regulations. We will also continue to provide updates as these proposed CFIUS regulations are finalized, and as accompanying regulations are released, including the Department of Commerce’s regulations implementing the Export Control Reform Act of 2018.
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