Jurisdictional limits on the Committee on Foreign Investment in the United States (CFIUS) regarding the review of certain real estate transactions have led Congress to introduce proposals expanding its jurisdiction and certain states to adopt more restrictive laws and regulations on real estate acquisition by certain foreign persons. Some of these state laws may be subject to challenges on constitutional and other grounds, and Florida SB 264 may be the first such test case.

Historically, national security issues only occasionally arose in real estate transactions based on the proximity of the real estate to military bases and strategic ports and the rights of the foreign investor in the real estate. The Foreign Investment Risk Review and Modernization Act of 2018 (FIRRMA) and the implementing regulations clarified and expanded the rules determining when a real estate transaction constituted a “covered real estate transaction” separate and apart from the acquisition of control over a US business,[1] although filing remained (and remains) voluntary.[2]

In December 2022, CFIUS determined that it did not have jurisdiction to review Chinese company Fufeng Group Limited’s (Fufeng) proposed $700 million corn milling project in North Dakota.[3] The news came after CFIUS completed a three-month review and investigation of Fufeng’s purchase from a private citizen of a 370-acre greenfield site in Grand Forks, North Dakota, to build a wet corn mill.

Although the land was near an Air Force base, the facility was not listed as a military installation that permitted CFIUS review. Criticized for this decision, CFIUS has recently proposed additions to the list of covered real estate. The Fufeng decision reinvigorated Congressional efforts to expand CFIUS’s jurisdiction to cover agricultural and other lands. Congress members have proposed changes to CFIUS as part of amendments to the National Defense Authorization Act (NDAA) as well as through independent legislation. Some of the proposals would expressly preempt conflicting state action while others are silent on the subject.

Various states have filled the gap created by the jurisdictional limitations of CFIUS and passed legislation restricting the ability of certain foreign persons to acquire real estate in their state. Some of these states cite national security as the statutory basis, creating potential challenges on the basis of federal preemption.

For example, Florida SB 264, which prohibits the purchase of real property by persons in or from the People’s Republic of China, was passed in May 2023 and has been challenged on the grounds of federal preemption, as well as violations of equal protection and the Fair Housing Act. This case may provide one of the first opportunities for a court to review and rule on the preemption issue.

CURRENT CFIUS REGIME

The US Department of the Treasury, which chairs CFIUS, has the authority to review foreign investment in US businesses as well as certain real estate transactions. When CFIUS reviews such transactions, they can block the transaction from occurring or enforce mitigation measures that are negotiated as part of a national security agreement.

However, Congress limited CFIUS’ authority to only review purchases of real estate in air or maritime ports or in a prescribed proximity to military installations (defined as within 100 miles of the base). CFIUS maintains a list of ports and military installations for this purpose, and Appendix A to Part 802 to Title 31 of the Code of Federal Regulations identifies 211 currently sensitive US military installations across the United States. Disclosure of the transaction to CFIUS remains voluntary, although CFIUS can conduct a national security review at any time for covered transactions that were not submitted for clearance by CFIUS—the so-called non-notified outreach.

This statutory and regulatory confinement of CFIUS’ jurisdiction has resulted in very few reviews of real estate as noted in CFIUS annual reports.[4] Therefore, CFIUS continues to expand its jurisdiction to review real estate transactions that may impact US national security.

PROPOSED CHANGES TO CFIUS REAL ESTATE REGULATIONS

On May 5, 2023, the Treasury Department published a proposed rule in the Federal Register to expand the list of sensitive military installations subject to review under CFIUS' authority, applicable to certain real estate transactions involving foreign investors or acquirers.[5] The proposed rule would add eight new military installations to Appendix A, including seven US Air Force bases principally involved in the ongoing development of the B-21 Raider stealth bomber aircraft, as well as the Iowa National Guard Joint Force Headquarters, all of which would be added to Part 2 and thus be subject to the expanded 100-mile geographic range.

Importantly, the proposed rule, if adopted, would not change the filing requirements associated with real estate transactions, which would remain voluntary under CFIUS' real estate regulations (Part 802).

The eight additions to Appendix A include:

• Air Force Plant 42, Palmdale, California
• Dyess Air Force Base, Abilene, Texas
• Ellsworth Air Force Base, Box Elder, South Dakota
• Grand Forks Air Force Base, Grand Forks, North Dakota
• Iowa National Guard Joint Force Headquarters, Des Moines, Iowa
• Lackland Air Force Base, San Antonio, Texas
• Laughlin Air Force Base, Del Rio, Texas
• Luke Air Force Base, Glendale, Arizona

However, these additions may be heralding additional changes to CFIUS’ authority to review real estate transactions.

CONGRESSIONAL PROPOSALS TO EXPAND CFIUS JURISDICTION

Fueled by the Fufeng decision by CFIUS determining that it did not have jurisdiction, the current area of greatest bipartisan concern is foreign ownership of farmland. The Senate Agriculture Committee is considering whether to hold hearings on the topic,[6] and Senator Jon Tester (D-MT) authored a bipartisan bill, which would prevent Russian, Chinese, Iranian, and North Korean citizens and companies from purchasing US farmland.[7]

Some lawmakers and other commentators have concluded that this is a reactive and piecemeal approach toward foreign direct investment review that does not adequately safeguard US national security.[8]

Recent proposals also include a bipartisan bill that seeks to establish a presumption of non-resolvability” by CFIUS as well as make filing mandatory.[9]

Members of both parties have urged the Biden administration to take stronger action and have continued to introduce other bills to broaden the federal government’s oversight and control over foreign investment in real estate—with a special emphasis on CFIUS.[10] Opponents of these measures fear that these additional authorities could result in civil rights violations and discrimination.[11]

As politicians continue to propose additional measures on China and national security, it seems likely that a majority of Congress is in favor of expanding the federal government’s authority to review and block foreign investment in real estate—especially when investors are from China, Russia, Iran, and North Korea.

For example, on July 25, the Senate voted 91-7 to amend the National Defense Authorization Act to (1) prohibit businesses based in China, Russia, Iran, and North Korea from purchasing US farmland and (2) require CFIUS review of specific types of land purchases by investors from any other foreign country.[12]

While some of these proposals address the issue of federal preemption, many are silent on the subject.[13]

STATE LEGISLATIVE SOLUTIONS

Some state governments have promulgated laws and regulations governing the purchase of real estate by foreign investors. Since January 2023, more than half of the states have proposed at least one bill relating to foreign investment in real estate with the most recent states being Michigan and Wisconsin.[14] These range from an absolute prohibition on certain acquisitions, to narrowed permissions for specific purposes, while others merely require reporting to the state. Lawmakers in other states are watching these activities and considering whether to pass similar measures.[15]

Because state interests, types of land, and public needs vary greatly between the states, there is no one-size-fits-all solution;[16] each can tailor its statute or proposal to address its respective concerns. Like the federal government, many states are currently considering some regulation focused on foreign ownership of farmland.[17]

A state survey can be found at the National Agricultural Law Center.[18] Challenges to state legislation restricting acquisitions by certain foreign persons are likely to face challenges on this ground, as well as other constitutional and federal statutory grounds, including equal protection and the Federal Housing Act.

FEDERAL PREEMPTION

Under the US Constitution, federal laws will generally preempt state law where federal and state law conflict or the federal government has or may occupy the field.[19] The analysis of whether a state law is preempted by federal law can be quite complex. There are two types of implied preemption—field and conflict:

• Conflict preemption is when compliance with conflicting federal and state regulations is either impossible or the state law presents an obstacle to compliance with the federal law.
• Field preemption is when a state attempts to regulate an interest in the federal domain.[20]

Because foreign affairs and national security traditionally fall under the purview of the federal government, states have only been permitted to pass statutes relating to national security when the federal government had not previously acted in that area, such as in the following instances:

• The US Supreme Court ruled in Crosby v. National Foreign Trade Council that a conflict inherently existed when both the federal and state government imposed various sanctions on Burma.[21]
• In 2013, the US Court of Appeals for the Eleventh Circuit ruled that Florida’s “Cuba Amendment,” which prevented companies that did business in Cuba from bidding on public contracts worth at least $1 million, was unconstitutional, as it conflicted with federal sanctions on Cuba.[22]

Although the state statutes did not (1) expressly contradict or (2) implicitly preempt the federal sanctions, they did attempt to regulate an interest in the federal domain which weakened the president’s ability to unilaterally conduct foreign relations. However, unlike sanctions, trade, and embargoes, which have historically been recognized as the responsibility of the federal government, federal preemption in the context of the regulation of private ownership of land is less clear.

Arguments exist for both sides. Private ownership of land is an inherently local interest. Removing (or curtailing) a state’s ability to regulate local ownership of land within its borders undermines one of the fundamental roles of local government. Historical precedent also demonstrates that the federal government can (and should) instruct states on what types of rules and regulations are appropriate in the context of civil rights and the prevention of racial discrimination. Even eminent domain—a right for the government to take and convert property to public use—is exercised by both the federal and state governments.

On the other hand, since 1789, national security and foreign affairs have been the primary responsibility of the US federal government. The failure of individual states to cooperate and manage their own foreign affairs was a primary motivation for the creation of the original Constitutional Convention. Whether it be the signing of treaties, declarations of war, commanding of the armed forces, regulating international and interstate trade, conducting diplomacy, or managing other aspects of national security, the federal government is the primary, and usually sole, authority.[23]

As an interagency committee made up of US government agency members, CFIUS occupies a unique role to identify, assess, and mitigate any risks to US national security related to the acquisition of real estate. Bipartisan recognition of this point likely informed a recent amendment to the NDAA, which would expand CFIUS’s jurisdiction to review real estate acquisitions involving foreign persons. However, unlike existing CFIUS authorities, the amendment would also introduce a baseline prohibition on the acquisition of US real estate by persons from certain countries, including China.

The Florida statute is currently being challenged on preemption grounds, among others, and may provide a first test case of the issue, which could ultimately go before the US Supreme Court. Given the differences among state legislation in this area, the federal preemption analysis may vary from state to state.

FEDERAL PREEMPTION IN ACTION: A CASE STUDY

In Shen v. Simpson, Chinese citizens residing in Florida and the ACLU challenged a new Florida law, SB 264, which prohibits residents from China that are non-US citizens from purchasing property. The plaintiffs make several claims, including that the law violates the Equal Protection Clause of the Fourteenth Amendment, the Fair Housing Act, as well as the Due Process Clauses of the Fifth and Fourteenth Amendments.[24]

Additionally, the plaintiffs also alleged that the law violates the preemption doctrine. Plaintiffs argue that the existence of CFIUS and the expansion of its jurisdiction over some real estate transactions indicate that, in the interest of national security, the federal government has articulated a process and policy for foreign investment in real estate—making it the exclusive domain of the federal government.

The state countered that regulations over individual land ownership is an issue that the state is best positioned to address and argued that a jurisdictional gap still exists, as the state law does not conflict with CFIUS’ authority.[25] According to the state, because the real estate transactions at issue fall outside of CFIUS’ geographic scope, they are outside of the federal government’s domain. They posit that because the federal government had statutorily limited CFIUS to only a small percentage of real estate transactions in the state, the state could regulate the rest.

The Department of Justice, while declining to intervene (as of yet), filed a Statement of Interest in the case that supported some of the plaintiff’s arguments.[26] Notably, it did not take a position on preemption, which Florida used in its reply brief to allege that the federal government agreed that CFIUS does not preempt the state legislation. However, it is unclear whether this silence at this early stage of the litigation indicates an agreement with Florida’s position on federal preemption.

A hearing on the motion for preliminary injunction occurred on July 18, 2023, but the judge indicated that a ruling on the case is not imminent. Because of the other claims at issue, a ruling may not address the preemption claims at this stage.

Litigation over this question may not be limited to the Florida law. In Texas, the Lone Star Infrastructure Protection Act prevents companies and governmental entities from contracting with companies tied to China, Russia, Iran, or North Korea for projects related to critical infrastructure.[27] Although this legislation does not represent a total ban on foreign investment and is more narrowly tailored than the Florida legislation, this act could also face preemption challenges because it interferes with the president’s foreign affairs powers over national security matters.

NAVIGATING FOREIGN INVESTMENT GOING FORWARD

Because the status of the law at both the federal and state level is in flux and legal challenges to state legislation may not be resolved soon, foreign investors in real estate need to focus not just on federal law and regulation but also any applicable state law and regulation and should not presume that state laws will be struck down. Foreign investors should prepare for the expansion of federal jurisdiction either by proposed regulation of CFIUS or by new legislation.

It is possible that the current voluntary filing regime for real estate may also be changed to include certain mandatory filing requirements, but even if it is not, foreign investors should be aware that CFIUS has been more aggressive and has more resources to conduct so-called non-notified outreaches to the parties following the closing of a transaction.

Summer Associate Moshe Klein contributed to this LawFlash.

[1] See Morgan Lewis LawFlash Revisiting CFIUS Jurisdiction Over Real Estate Transactions.

[2] See Morgan Lewis LawFlash CFIUS’S Final Real Estate Regulations: Still a Largely Voluntary Process.

[3] See Knox Radio Fufeng ‘Looks Forward’ to Building GF Plant After CFIUS Says it has ‘No Jurisdiction’.

[4] CFIUS Annual Reports 2008-2022

[5] The proposed rule is published at 88 FR 29003.

[6] Politico Scoop Senate Eyes Action on Chinese Farmland Purchases.

[7] Politico Newsletter Tester Wants a Crackdown on China Farmland Buys.

[8] See Analysis in Just Security With New “Alien Land Laws” Asian Immigrants Are Once Again Targeted by Real Estate Bans.

[9] Foreign Investment Watch Policy Note Bill Wants CFIUS to Presume “Non-Resolvability” in Certain Transactions.

[10] See National Agricultural Law Center Congressional Considerations on Restricting Foreign Investments in U.S. Agriculture.

[11] See Analysis in Just Security With New “Alien Land Laws” Asian Immigrants Are Once Again Targeted by Real Estate Bans.

[12] Senate Amendment 813 to the National Defense Authorization Act Fiscal Year 2024.

[13] Representative Al Green (D-TX) Texas proposed an amendment that explicitly preempts any state or local laws that restricts the purchasing of property based on citizenship.

[14] See National Agricultural Law Center The Feed Newsletter.

[15] See National Agricultural Law Center Statutes Regulating Ownership of Agricultural Land.

[16] See National Agricultural Law Center Foreign Ownership of Agricultural Land: A Legislative Roadmap Primer.

[17] See National Agricultural Law Center The Feed Newsletter.

[18] National Agricultural Law Center Statutes Regulating Ownership of Agricultural Land.

[19] See Article VI, Clause 2, of the Constitution.

[20] See Congressional Research Service Federal Preemption: A Legal Primer.

[21] Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000).

[22] Odebrecht Construction, Inc. v. Secretary, Florida Department of Transportation, 715 F.3d 1268 (11th Cir. 2013).

[23] See United States v. Curtiss-Wright Export Corp., 299 U.S. 304 (1936).

[24] Shen v. Simpson Complaint.

[25] Shen v. Simpson Memorandum in Opposition to Plaintiff’s Motion for Preliminary Injunction.

[26] Shen v. Simpson Department of Justice Statement of Interest.

[27] See CFIUS Preemption in Harvard National Security Journal.

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