Foreign Investment in U.S. Land Catches Federal Government’s Eye
In this article for Bloomberg Law, partners Mario Mancuso and Luci Hague and associate Erika Krum discuss a Government Accountability Office (GAO) report about U.S. tracking on foreign investment in U.S. land and how investors should be diligent about compliance issues when land is near sensitive sites.
Last year, federal and state governments ramped up scrutiny of foreign investment in US agricultural land, and this year will see renewed attention after the federal government made significant findings about shortcomings in its current processes.
On Jan. 18, the Government Accountability Office released a report assessing the Department of Agriculture’s efforts to collect, track, and share information on foreign investments in US agricultural land.
The report responds to an October 2022 letter from a bipartisan group of 130 members of Congress, which called on the GAO to examine the US government’s efforts to monitor foreign investment in US agricultural land and the impact on national security.
The requesting members of Congress referenced national security concerns arising from a 2021 transaction in which the US subsidiary of China-based Fufeng Group purchased agricultural land in North Dakota near a military base. The Committee on Foreign Investment in the United States subsequently reviewed the purchase, then concluded it lacked legal authority to do so. CFIUS’ conclusion that it lacked legal authority to review the Fufeng transaction sparked controversy, but the deal was ultimately scuttled by the local city council.
With this transaction under the microscope, the members of Congress also found perceived inaccuracies and a lack of reliability in the reporting mechanism of foreign investment under the Agricultural Foreign Investment Disclosure Act of 1978. The GAO concluded that the Congressional requestors had it right.
The USDA’s current procedures and reporting mechanisms don’t enable it to reliably track and report foreign investment in US agricultural land. Last year, state lawmakers acutely focused on preventing a Fufeng transaction repeat, and legislatures in more than half of states considered or adopted new restrictions on foreign investment in land within their borders.
We expect this will continue in CY 2024 as state legislatures come back into session. And, to date, a half-dozen bills have been introduced in the 118th Congress to address foreign investment in land, including a bill that would place the Secretary of Agriculture on CFIUS.
Takeaways
While there’s not yet a consensus on how foreign investment in land should be reported and regulated, we expect the bipartisan push for measures to address perceived national security risks from such transactions will remain a top priority for US lawmakers in the near term. Here are several of the report’s key findings and our takeaways:
GAO found CFIUS doesn’t generally receive AFIDA disclosures in a timely manner. CFIUS receives AFIDA data only once per year, which means that disclosures could be almost two years old by the time they are shared with CFIUS. While CFIUS can call in transactions that weren’t voluntarily notified at any time post-closing, CFIUS’ enforcement team has been focusing on faster outreach to parties to non-notified transactions.
We expect the USDA and CFIUS will work to enhance USDA’s sharing, and CFIUS’ review, of AFIDA disclosures to enable CFIUS to identify non-notified transactions more quickly and efficiently.
GAO found AFIDA disclosures aren’t always accurate, and USDA reporting doesn’t include disclosure of information of investors above the “primary investor” in a corporate structure. The report identified a gap in USDA’s procedures to verify information provided on AFIDA forms and noted that the AFIDA form doesn’t always result in provision of accurate ownership information.
The report also indicates that a working group has revised the AFIDA form to better capture the types of foreign investment and uses of agricultural land more effectively but that the updated form has yet to be publicly released.
Investors should expect that AFIDA requirements may be revised to require more disclosure on investors in a corporate structure, and to more closely align with information that would enable CFIUS to identify non-notified transactions.
GAO determined that many parties that should make AFIDA filings don’t. The report indicated the USDA is expanding its data mining efforts to identify AFIDA non-filers. While penalties for AFIDA non-filers (or late filers) can reach up to 25% of the land’s fair market value, the report notes that most penalties are less than 1% of the value of land, and there were only eight AFIDA penalties assessed between 2012 and 2021.
We expect the USDA will ramp up its enforcement efforts. Investors should incorporate AFIDA assessments in post-closing checklists. Of note, “agricultural land” is defined broadly under AFIDA, and disclosure requirements may be triggered for transactions unrelated to the agricultural industry.
While CFIUS’ jurisdiction doesn’t overlap entirely with acquisitions that require AFIDA filings, the report emphasizes CFIUS can, and should, leverage AFIDA data in its national security review process. CFIUS has received relatively few filings for “covered real estate” transactions—for example, foreign investments in greenfield land without a US business.
In CY 2022, CFIUS reviewed only six filings for covered real estate transactions (versus 440 filings for all transactions). This may be caused by the fact no real estate transactions currently require mandatory CFIUS filings. However, CFIUS filings for real estate transactions are often warranted if land is close to US government or military sites.
Given likely increased information sharing between the USDA and CFIUS, it will be important for investors to ensure due diligence for transactions incorporates an assessment of whether a CFIUS filing may be warranted based on the land’s proximity to sensitive US government or military sites.
