Property Deals See More Scrutiny As Tip Sparks Forced Sale

Partner Mario Mancuso discusses with Law360 President Biden's executive order prohibiting the acquisition of real estate in Cheyenne, Wyoming, by Chinese investors, on the grounds that the transaction presented serious national security risks to the U.S.

The Committee on Foreign Investment in the United States is likely this year to look at additional real estate deals near government property, experts told Law360 Tuesday, a day after the White House ordered a real property divestment near a Wyoming Air Force base following national security concerns.

On Monday, the White House announced its first such real estate divestment order since President Joe Biden took office, saying an organization that's partly owned by Chinese nationals is required to sell off land near a Wyoming Air Force base that had been used for cryptocurrency mining. The government reportedly learned of the potential security threat via a tip from Microsoft.

The property in question is less than a mile from the F.E. Warren Air Force Base; CFIUS raised national security threats due to both the proximity to the base and a suspicion that specialized foreign equipment at the site could be used for espionage.

Experts anticipate additional scrutiny of foreign-owned properties close to government property, given that CFIUS has a variety of ways for catching wind of would-be security threats and that the White House and CFIUS have expanded jurisdiction when it comes to real estate near certain government properties.

"CFIUS is actively pursuing non-notified cases and enforcement actions more frequently than ever," said Mario Mancuso, a partner at Kirkland & Ellis LLP. "Although this is the first divestment in this calendar year to be publicly reported, I don't expect it will be the last."

Congress in 2018, with the passage of the Foreign Investment Risk Review Modernization Act, gave increased jurisdiction to CFIUS and the White House when it comes to looking at national security threats posed by real estate close to certain government properties.

"We can expect to see more such activity following yesterday's order. The order also reflects CFIUS's broader commitment to ramping up its monitoring and enforcement capabilities — which includes the encouragement of tips and referrals," said Christine Daya, a partner at DLA Piper. "Widespread publicity about Microsoft's role in this case may encourage other similarly situated U.S. companies to come forward with their own concerns under similar circumstances."

While the order yesterday on the one hand signals the government may look into other current property holdings by foreign governments, the news also sends a signal that future deals may be more closely scrutinized than they had been in the past.

"That is notable in evaluating the likelihood that CFIUS would review a transaction that is not filed. There is an anonymous tip line," said Robert Friedman, a partner at Holland & Knight LLP.  "That is something to be considered when evaluating CFIUS risk."

That, experts say, has ramifications when planning for CFIUS review, and for evaluating risk.

"Parties to private transactions should not expect that they will be able to avoid U.S. government scrutiny simply because their deals are not publicly announced," Mancuso said. "It's critical for both foreign investors and U.S. sellers to ensure that they're considering how CFIUS may view the location of a business in assessing whether and how to engage with CFIUS in connection with a deal."

Monday's order — and the fact that it came from a tip — also shows that there are various avenues for a potential security risk to come to the attention of the government, even if the parties doing the initial transaction don't make a CFIUS filing, as was the case with the Wyoming deal.

"The fact that CFIUS learned of the underlying transaction through a public tip just underscores how often CFIUS learns of transactions that raise national security concerns through open sources — whether public tips, press releases, or securities filings," said Brian Curran, a partner at Hogan Lovells.

And expect additional scrutiny on crypto-mining operations, given that various states have already identified potential threats, Daya said.

"In addition to concerns relating to intelligence gathering, crypto mines put immense pressure on the power grid and could be leveraged for targeted blackouts or cyberattacks," Daya said. "We should expect that the U.S. government is scrutinizing those operations from a national security perspective and may see additional forced divestitures in the coming months so long as CFIUS maintains jurisdiction to review."