As the Committee on Foreign Investment in the United States (CFIUS) continues to expand its jurisdictional reach, investors, property owners, and landlords should be aware of a growing focus on real estate transactions. Bridging a perceived gap between CFIUS’ mandate to safeguard U.S. national security and foreign investment in the U.S. real estate market, the U.S. Department of Treasury recently issued a Notice of Proposed Rulemaking (NPRM) that would strengthen CFIUS’ jurisdiction over real estate transactions. Specifically, the NPRM would greatly expand the list of military installations that could raise national security concerns, empowering CFIUS to review transactions involving the surrounding real estate; and expand the term “military installation” to encompass a larger number of sensitive facilities. These proposed changes are in response to a recent comprehensive assessment conducted by the Department of Defense regarding its military installations, and reflect the perception that real estate transactions in close proximity to sensitive USG facilities may convey strategic advantages to U.S. adversaries.

Background: The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) granted CFIUS authority to review certain real estate transactions involving foreign transaction parties and property near specified military installations—and to “take action” when CFIUS concludes the transaction raises national security concerns. There is no mandatory filing requirement for real estate transactions and consequently CFIUS often initiates reviews of these transactionsafterthe transaction has closed: for example, CFIUS recently unwound a real estate acquisition by a Chinese-backed cryptocurrency miner due to its proximity to Warren Air Force Base and has also initiated reviews (post-closing) of real estate investments near strategic military installations. In these circumstances, transaction parties should be aware that CFIUS maintains the authority to not only initiate a formal review, but also to require the parties to enter into a mitigation agreement, or in more extreme circumstances, order divestment or unwinding.

Proposed Changes:

• Expand the list of military installations. The NPRM would expand the list of covered military installations. The most notable proposed changes include:
  • Expanding CFIUS’s jurisdiction over real estate transactions to include those within a one-mile radius around 40 additional military installations. This list is found in Part 1 of Appendix A to Part 802 (“Appendix A“).
  • Expanding CFIUS’s jurisdiction over real estate transactions to include those within a 100-mile radius around 19 additional military installations (i.e., Part 2 of Appendix A). Part 2 of Appendix A focuses on army combat training centers, major range and test facility base activities, and military ranges owned by the Navy or Air Force, or joint forces training centers that are located in certain states.
  • Eight (8) additional military installations presently in Part 1 of Appendix A would also be transferred to Part 2 of Appendix A, giving the surrounding territory heightened scrutiny.
• Expanded Definition of military installation. The NPRM would also expand the definition of “military installation” in section 802.227 of the regulations. Broadening this definition would significantly expand CFIUS’s jurisdiction over real estate transactions to include:
  • Space Force bases, stations, and major annexes thereof would be included in the updated list. ¹
  • Military ranges owned by the Navy or Air Force, or joint forces training centers would no longer be limited to certain states. This proposed change would broaden the category to any military range as appropriate and is consistent with the definition of military range. ²
  • Naval bases and air stations applicable under this definition would be broadened to include any relevant naval base and air station and major support activities and annexes thereof. The current rules limit the definition of naval bases and air stations to those that contain squadrons and supporting commands of the Submarine Force Atlantic or Submarine Force Pacific and major offices thereof. ³

Bottom Line and Key Takeaways: These proposed rules would represent a significant expansion of CFIUS jurisdiction over real estate transactions:

• If these rules are adopted, CFIUS would gain jurisdiction over larger swaths of real estate—giving it the ability to review a broader scope of real estate acquisitions.
• The proposed rules would retain the existing exceptions to CFIUS enforcement (most notably, certain exceptions for transactions involving single housing units, certain commercial space in multi-unit buildings, and certain real estate that is within an urbanized area or urbanized cluster). In other words, office space and commercial real estate forming the nucleus of many urban commercial districts would not necessarily be impacted.
• It is increasingly important for transaction parties to analyze the potential CFIUS impacts on a real estate transaction—preferably, early in the deal cycle and as a routine part of the due diligence process. Sellers and foreign purchasers should carefully consider these implications and ensure they are appropriately addressed in the relevant deal documents.

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Comments will be accepted until August 19, 2024. For any questions about the NPRM or for guidance about its potential impact on inbound real estate investment, please contact a Sheppard Mullin attorney from the CFIUS team.

Footnotes

1. See 31 C.F.R § 802.227(e) & (f).

2. Currently, the list of such military ranges is limited to facilities in Arizona, California, Florida, Idaho, Iowa, Mississippi, Nevada, North Carolina, North Dakota, Oregon, South Dakota, Texas, or Wisconsin. See 31 C.F.R § 802.227(m). The definition of “military range” is found in 10 U.S.C. 101(e)(1).

3. See 31 C.F.R § 802.227(n).