Growing concern about foreign surveillance and intelligence gathering led Congress to provide CFIUS with authority to review real estate transactions by foreign parties when it passed FIRRMA. A discussion of FIRRMA and the new regulations can be found here. Prior to FIRRMA, CFIUS began to act on transactions solely on the basis of the proximity of real estate to U.S. military installations. In 2010, for example, CFIUS unwound a transaction that involved a turbine farm owned by a Chinese company because of its proximity to a Naval Base that trained drone aircraft pilots. At the time, there were concerns raised that CFIUS did not have jurisdiction to block or unwind real estate transactions that did not involve the acquisition of a U.S. business. FIRRMA addressed this issue by providing CFIUS statutory authority to review the sale, lease or concession of real estate in the United States by a foreign investor and block the transaction if there are unresolved national security concerns, or, in those instances where the parties did not provide a pre-transaction disclosure, unwind the transaction. This includes transactions involving undeveloped land that previously fell under a greenfield exception.

The regulations create the term “covered real estate” to describe the location of real estate that could be the subject of a “declaration” (the short form disclosure) or a traditional “notice.” The scope of coverage is real estate within a certain proximity of locations CFIUS believes create national security risks of surveillance or information gathering by foreign parties. These areas are: 1) located within or will function as an airport or marine port; 2) real estate that is in “close proximity”(within one mile) of military installations and other governmental facilities; 3) real estate that is within an “extended range” (within 99 miles) of specified military installations; or 4) any part of certain military installations located within the territorial sea of the United States. All of the military installations and governmental facilities are listed in Appendix to 31 C.F.R. Part 802, which describes over 200 locations all across the United States.

The foreign investor must obtain three or more of the following rights with respect to the “covered real estate”:

• To physically access the property
• To exclude others from physically accessing the property;
• To improve or develop the property; or
• To affix structures or objects.

There are numerous exceptions to these regulations, including real estate in “urbanized areas” (defined as areas that have a minimum population of at least 50,000 individuals) and “urban clusters” (defined as areas that have at least 2,500 individuals but fewer than 50,000 individuals). Additionally, transactions involving residential housing, lease and concessions in airports, and maritime ports for the purpose of retail sales are excluded. If the foreign investor enters into a covered real estate transaction involving a multi-unit building, the transaction could be exempted if the foreign investor does not hold, lease, or have a concession more than 10% of the total square footage of the commercial space and does not represent more than 10% of the total number of tenants.

The concept of an excepted investor and excepted state that exempts foreign investors from Australia, Canada, and the United Kingdom, including Northern Ireland, also exempt qualifying excepted investors from these real estate disclosure rules. (See the CFIUS article discussing qualification for excepted investors and excepted states.)

A disclosure or notice under 31 C.F.R 802 is also not required if the parties to the transaction involve a TID Business for which a filing under 31 C.F.R. 800 is being pursued. Determining whether to submit a declaration that has a 30-day response or a traditional notice that has an initial 45-day response requires a detailed and complex analysis regarding the location of the property, the foreign investor seeking to acquire rights to the real property, and the activities that are planned for the real property. The disadvantage to filing the shorter declaration is that CFIUS is not obligated to approve or block the transaction: CFIUS could require the parties to submit the longer notice which would restart the review process.

Identifying whether a real estate transaction will require a filing with CFIUS must be done early and implicates numerous factors that need to be considered. Early assessment can give the parties a realistic time table for scheduling the closing of a real estate transaction that is located in the zones identified by CFIUS as “covered real estate.” Additionally, if the real estate transaction is part of a larger transaction the parties need to assess what type of filing should be made and whether the transaction can be modified to lessen any national security concerns that might arise from a CFIUS- review of the transaction.