CFIUS Is Not a Flu Strain: When Commercial Real Estate Transactions May Require Additional Regulatory Review
The Committee on Foreign Investment in the US (CFIUS) is an interagency organization that identifies commercial transactions that raise US national security considerations when there is significant foreign ownership of US businesses and, less well-known, when a non-US person acquires US real estate. CFIUS can recommend that the President block or unwind transactions with significant foreign ownership and risk to critical technology, infrastructure, and data.
US real estate transactions involving CFIUS in which LP’s transactional lawyers have been involved include representing a non-US investor who acquired a Washington DC office building in which the Department of Defense was a tenant and representing a joint venture with foreign ownership that acquired a portfolio of industrial/warehouse buildings located near a US military base. In non-real estate M&A transactions, LP has represented a European company acquiring a US company that manufactures components used in US Air Force jets.
This past summer, CFIUS proposed new rules that, when made final, will expand the potential scope of CFIUS review of US real estate transactions. Among other things, the proposed rules identify 19 military installations for which CFIUS jurisdiction exists within a 100-mile radius instead of the standard one-mile radius. While the existing and proposed rules will not present issues for most US investors in US real estate, US real estate fund sponsors with foreign investors need to be increasingly sensitive to the potential application of CFIUS’ existing and proposed rules. Under applicable regulations, CFIUS review of real estate (and private equity) transactions may be triggered when non-US investors have control of a US fund. The definition of control is both broad and fluid and may extend to real estate funds in which non-US ownership equals or exceeds 10 percent. There are also circumstances in which CFIUS has authority to review transactions even when the foreign investor does not have obvious control (e.g., has veto rights over certain critical decisions).
Unless an exemption applies, CFIUS rules will sometimes require a pre-closing clearance process (with significant filing fees and hefty failure to file penalties). An optional filing procedure can also be used when the rules are unclear and the purchaser wishes to mitigate the risk of post-transaction unwind orders. While most real estate transactions that appear to have CFIUS exposure can be resolved by attorney analysis rather than through filings, US real estate fund sponsors should be sensitive to the composition of their investor base and consider potential sensitivities such as government tenants and locations near government and military facilities. US sellers to prospective non-US buyers should also be sensitive to potential CFIUS exposure: while the burden is usually on the non-US buyer, the likelihood of transaction completion and transaction timing should be considered when assessing the credibility of a prospective non-US purchaser.