3 Takeaways On CFIUS' Bid To Expand Real Estate Coverage

In this Law360 article, partner Luci Hague discusses the U.S. Department of Treasury's recent proposal to add more military sites to the Committee on Foreign Investment in the United States' (CFIUS) authority and the impact the announcement will make. 

Real estate practitioners should not overlook the Committee on Foreign Investment in the United States' plan to bring 59 more military sites under its jurisdiction for reviewing land deals, even if the proposal comes as no surprise, attorneys said.

The U.S. Department of the Treasury issued a notice of proposed rulemaking earlier this month to expand the number of sensitive facilities where, if undeveloped real estate is bought or leased by a foreign person within a certain distance from the installation, the committee would have the authority to probe the transaction for any potential issues involving national security.

The proposed rule aims to add 40 military installations to its list of sites where CFIUS would have jurisdiction to review a deal within 1 mile of the location and increase its 100-mile proximity site list by 19 facilities.

The amendment, if adopted, would build on regulations the Treasury Department put into effect over four years ago through the Foreign Investment Risk Review Modernization Act of 2018. The act gave CFIUS the power to scrutinize standalone acquisitions of real estate that didn't already fall under the committee's jurisdiction to review transactions involving a U.S. business.

In one way, the plan is simply a matter of housekeeping, according to interviews with lawyers specializing in CFIUS reviews.

The proposed rule is the result of the U.S. Department of Defense's annual review of its footprint. The Treasury Department added eight military sites to the list last summer, after a previous assessment.

In another way, the proposal sends a broader message to the corporate world: that the U.S. government is continuing to pay attention to cross-border transactions involving land located near military bases, and deal practitioners should take note, attorneys told Law360.

"There's a ton of new sites that just got added — more than 50 across 30 states, so it's pretty significant. It's all over the country," said Luci Hague, a partner in Kirkland & Ellis LLP's international trade and national security practice group.

Here are three major takeaways from CFIUS' proposed rule, which is going through a 30-day public comment that ends Aug. 19.

Message To The Market

By increasing the number of military sites on CFIUS' radar, the committee is telegraphing to the market that the foreign investment deals — when they involve land close to an installation — continue to be an important issue to the U.S. government.

The proposal also signals which parts of the country companies and their counsel should pay close attention to when they're considering a cross-border deal that involves a company leasing or buying property in those areas, attorneys said.

"Even if your deal doesn't have a traditional real estate component — whether that is because it's a multifamily deal, or commercial real estate, or buying real property — let's say you're buying a software company," Hague said. "It's really important to look at where a site is in relation to [the company's] properties."

There are several industries outside the real estate sector, such as the energy industry, where a merger or corporate acquisition involves leasing or purchasing land, said Alexis Early, a partner in Jenner & Block LLP's national security and crisis practice.

"Sometimes folks try to hermetically seal and divide the two types of CFIUS jurisdiction and say, well, 'It's either focused on a U.S. business, or it's focused on real estate,' and that's not really the case," Early said. "I think it's really a proximity question, and that can come up regardless of the nature of the transaction."

Part of what's driving CFIUS to continue to focus on proximity is the U.S. government's concern about surveillance, Hague noted.

"If you own the real estate, you have more of an ability to conduct surveillance on military sites, whether that's looking at traffic going into a base, for example, or just observing airspace or traffic patterns," she said.

The U.S. government does not have a tool to prevent people from buying foreign-sourced equipment that could be used on a property for surveillance, but the Treasury Department can still address that scenario through CFIUS, as the committee can force a company to divest ownership of the land on which the equipment is being used.

"If CFIUS can take out the underlying property ownership, you address the two birds with one stone," Hague said.

Cross-Border Deal Diligence Key

While filing a declaration to CFIUS is mandatory for some circumstances involving U.S. businesses, the filing process is voluntary when a transaction is purely for real estate.

But deal practitioners may still want to consider filing with CFIUS even if they don't have to, depending on where the land that's being bought is located and what their client prefers, attorneys said.

Getting your deal cleared by CFIUS ahead of time, before the transaction closes, allows the parties to receive a permanent "safe harbor" that limits the U.S. government's ability to review and potentially disrupt the deal later on.

The safe harbor provision also protects the deal from disruptions into the future, even if the federal government's policies on national security change, Hague said.

"Even if something is not really risky today from a national security perspective, if there's a chance that it might be in 10 years, and you're planning on still owning the property in 10 years, it's smart to file," she said.

Every business has a different risk appetite, said Robert Friedman, an international trade lawyer and partner at Holland & Knight LLP.

"Some, if there is jurisdiction, they're far more inclined to make a filing than others," Friedman said.

Friedman said that CFIUS is not the only governmental body he pays attention to when working on cross-border deals.

"There's a lot of interest amongst state and local lawmakers when it comes to land ownership, as well, from foreign persons. You've got interest at the federal level, interest at the state level and just at the local level, which is resulting in far more scrutiny of these transactions," he said.

Concerns over foreign investment in U.S. land has been a focus for a bevy of Congressional lawmakers in the last few years. Some state political leaders have proposed or adopted restrictions on people and entities from certain countries — mainly China, Russia and Iran — from owning real estate near military sites.

"The different states are defining the universe of what is in scope and out of scope very differently," Friedman said.

More Updates Likely

The proposed rule is likely not going to be the last time CFIUS makes changes to its list of sensitive military installations, according to interviews.

Friedman said the addition of 59 new sites is not surprising to him.

"The government's footprint analysis of national security is not static," he said. "It's an iterative list of sites."

What's challenging about the proposed rule is that it adds an additional compliance burden for companies, he noted.

"It just requires close scrutiny of U.S. government announcements to make sure that there's no new site that would be in scope for a transaction that was not considered earlier," Friedman said.

Shawn Cooley, a partner in Weil Gotshal & Manges LLP's corporate department who focuses his practice on national security reviews, said the proposed rule demonstrates CFIUS' continued interest in real estate transactions.

"I would expect this to become fairly routine, that they would set up an annual procedure to see if there's any gaps, any additional facilities that need to be added to better allow them to review more transactions for potential concerns," Cooley said.

Some attorneys who spoke to Law360 Real Estate Authority said they expected the addition of 59 more military installations would likely result in CFIUS seeing more people file for reviews for real estate deals, due to the potential transactions' proximity to a sensitive facility.

Cooley said he didn't expect to see much of a difference in the numbers of reviews.

The proposed rule makes changes to regulations that pertain only to when CFIUS reviews acquisitions of undeveloped land or "pure" real estate, which hasn't been particularly common in the past, he said.

In most prior cases where a property's proximity to a military site raised alarms with the committee, the deals at issue involved investments in and purchases of a U.S. business, and the business also owned or leased real estate, he said.

CFIUS' most recent annual report to Congress showed that, out of the 440 transactions the committee reviewed in 2022, only 1.5% of the cases involved a purchase or lease of undeveloped land, he said.

"There are not a lot of acquisitions of undeveloped real estate of interest to the committee, because most of them are already covered under its existing control jurisdiction," Cooley said.

"The expansion of this new real estate jurisdiction just hasn't been very significant in practice," he added.