Proposed rule expands CFIUS jurisdiction of foreign real estate transactions near military installations

On July 8, 2024, the Secretary of the US Department of the Treasury, as chair of the Committee on Foreign Investment in the US (CFIUS), issued a Notice of Proposed Rulemaking (NPRM) regarding the expansion of the committee’s jurisdiction over certain real estate transactions by foreign persons in the US.[1]

Background

CFIUS has jurisdiction to review real estate transactions that involve foreign persons and real estate that is located near, within, or otherwise functions as part of certain US government sites, military installations, or critical infrastructure (such as airports and maritime ports) to address potential national security risks related to foreign intelligence collection and the exposure of sensitive activities – eg, weapons development, military training, sensor testing – conducted at such locations.[2]

Transactions involving the purchase or lease by, or concession to, a foreign person, of real estate within close proximity (a one-mile radius) or the extended range (within a 100-mile radius) of such locations, are at risk of CFIUS review unless such transactions are subject to an exception – eg, the real estate is located in an urbanized area or urban cluster.[3]   

The US Department of Defense (DoD), a key member of CFIUS, actively evaluates military installations throughout the nation. The DoD’s goal is to ascertain the significance of these installations to US national security and decide if they warrant inclusion in CFIUS regulations, thereby meriting protection from specific foreign real estate transactions or requiring geographical distance from certain foreign acquirers. 

For example, in December 2022, CFIUS determined that it did not have jurisdiction to review Fufeng Group Limited’s foreign purchase of a greenfield site in Grand Forks, North Dakota to build a corn mill project that was located approximately 12 miles from Grand Forks Air Force Base, where drones are operated and global communications are conducted by the DoD. 

As a result, and following extensive congressional scrutiny, the Grand Forks Air Force Base was designated by the DoD as critical to US national security and added to the CFIUS regulations several months later.

The proposed rule would expand CFIUS’s jurisdiction over foreign real estate transactions involving certain real estate that is located within (1) a one-mile radius of 40 additional military installations, (2) a 100-mile radius of 19 additional military installations, and (3) a 100-mile radius of eight military installations that were already listed in the regulations.[4]

In other words, CFIUS’s geographic coverage over certain foreign real estate transactions in the US would expand yet again and could have significant implications for US businesses seeking foreign investment or non-US companies seeking to purchase, lease, or develop properties or projects outside of urban areas. 

The proposed rule would also update the names and locations of certain military installations already listed in the current regulations to better assist the public in identifying the relevant sites.[5] 

Effective date

The proposed rule will likely follow the same timeline as previous CFIUS rules and become effective 30 days after the publication of the final rule in the Federal Register. The NPRM did not indicate that the rule would apply retroactively to transactions that have already been completed or are in progress, and we do not foresee CFIUS taking such an approach.

In the meantime, the Treasury has requested comments from the public on the NPRM, which must be submitted within 30 days after the date of publication in the Federal Register. In light of this development, DLA Piper stands ready to assist clients who are considering submitting their perspectives on the proposed regulations.

Potential implications for real estate investors, developers, and landlords

Although CFIUS is known for its review of foreign investment in US businesses, its real estate jurisdiction casts a wider net by allowing review of certain foreign real estate transactions, potentially including greenfield investments, commercial and brownfield development projects, leases, land use permits or concessions, and even operational maintenance or service agreements.

In our experience, these types of real estate transactions are often associated with energy, transportation, logistics, data center, telecommunications, agricultural, industrial manufacturing, chemical production, and mining projects and operations outside of urban areas.

As stated above, CFIUS’s review of foreign real estate transactions is generally focused on potential US national security risks stemming from foreign intelligence collection and the exposure of sensitive activities conducted near or within certain US government sites and military installations.[6] 

As such, we expect CFIUS to inquire about and focus on foreign real estate transactions that could facilitate such intelligence collection, as opposed to focusing on traditional technology transfer, personal data, or supply assurance risks. 

If a foreign real estate transaction is not notified to CFIUS and parties do not receive CFIUS approval, ie, safe harbor, CFIUS retains the authority to review that transaction at any time in the future, regardless of whether the real estate has been developed or operations have been initiated.

Once CFIUS asserts jurisdiction over a foreign real estate transaction, depending on the risks identified, it can impose costly and burdensome mitigation measures – eg, restrictions on who can access the real estate, how the property can be utilized, and how transaction parties can communicate with each other – or even force a divestment or sale of the property through the use of interim orders, national security agreements, or presidential orders. Violation of such measures could result in penalties of up to the value of the transaction (or $250,000) per violation for each transaction party. 

We expect that CFIUS will likely continue to exercise its real estate authorities to address potential US national security risks arising from foreign real estate transactions, thereby potentially creating even more uncertainty for parties trying to navigate an already complex US investment market.

Path forward

Because CFIUS intervention and adverse action could be highly detrimental, parties involved in foreign real estate transactions are encouraged to carefully analyze whether CFIUS has jurisdiction over the transaction and assess the benefits and risks of filing with CFIUS. 

Additionally, local governments are intensifying their efforts to implement policies akin to those of CFIUS, and parties involved in foreign real estate transactions, particularly in sensitive or strategic locations, may consider consulting with local counsel to adhere to any pertinent municipal and state laws that may impose additional restrictions or requirements.

To navigate the intricacies of the CFIUS process effectively, parties may consider seeking the counsel of legal professionals. Our firm boasts a comprehensive, interdisciplinary CFIUS practice that includes teams from our Corporate, Regulatory, and Government Affairs divisions, including former CFIUS regulators. 

For tailored guidance on CFIUS matters, clients are encouraged to reach out to the authors of this advisory, our dedicated CFIUS attorneys, or any partners within our firm’s National Security and Global Trade group. Our collective experience is at your disposal to ensure that your business interests are aligned with the evolving regulatory landscape.

Advisors can clarify new rules, identify CFIUS-reviewable deals, and aid in the submission process.  They also provide strategies to reduce risks and preemptively tackle security concerns.