In this article:

• CFIUS Review Might Apply to Your Real Estate Deal
• Notes for Lenders
• Contingent Equity Interest Considerations
• CFIUS In Action: Undoing a Closed Deal
• Proposed Rule: Broader CFIUS Reach
• Tips for Mastering a CFIUS Review

CFIUS Review Might Apply to Your Real Estate Deal

Most real estate professionals do not expect to seek approval from the president of the United States before closing a real estate deal. However, the U.S. Treasury Department’s recently proposed rule expanding the reach of the Committee on Foreign Investment in the United States (“CFIUS”) could lead to increased scrutiny of real estate deals based on the property’s location and the nationalities of parties involved, even if they don’t have a controlling interest. Real estate buyers, sellers, and financing providers should keep an eye on CFIUS activity to inform deal diligence.

Real estate transactions near sensitive locations are already subject to CFIUS review. Under the Defense Production Act of 1950 (the “Act”), the U.S. president has the authority to suspend or prohibit any “covered transaction” when, in the president’s judgment, there is credible evidence that the foreign person¹ exercising control over a U.S. business might take action threatening to impair the national security of the U.S. and the law does not otherwise provide adequate protection against such action.

CFIUS’ review of a real estate transaction may be triggered by voluntary notices provided by the transaction parties,  public tips, or other information.

CFIUS regulations implement the Act. CFIUS reviews transactions — even transactions that have already closed — that could result in foreign control of a U.S. business to determine the effect of such transactions on U.S. national security. Historically, CFIUS focused on corporate transactions. However, CFIUS’ jurisdiction expanded to real estate after the passage of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) modified the definition of “covered transactions” to include certain real estate transactions near specific U.S. ports and military installations.

As of August 2024, covered real estate transactions include the purchase, lease, or concession of certain real estate by a foreign person. These transactions can occur when a foreign person’s property rights change such that they have at least three of the following rights²:

1. The right to access the real estate;
2. The right to exclude others from physically accessing the real estate (this does not need to be a complete right to exclude);
3. The right to improve or develop the real estate; or
4. The right to attach fixed or immovable structures or objects to the real estate.³

Note for Lenders

Under Sec. 802.303 of the Final Rule, the extension of a mortgage, loan, or other financing by a foreign person for the purpose of the purchase, lease, or concession of covered real estate, whether or not the financing is secured by such real estate, is not by itself a “covered real estate transaction.”

However:

• If the financing, mortgage, loan, or similar is a mechanism through which a foreign person acquires property rights in covered real estate that could constitute a “purchase, lease, or concession,” such arrangement may be a covered real estate transaction under CFIUS.
• If a lender has provided financing in connection with property that is or could be subject to CFIUS review, including through change of control of the holders of direct or indirect interests resulting in a change in rights of a foreign person with respect to such real property, the lender may have to undo the transaction if a national security risk is identified.
• Further, a lender who takes possession of a property due to foreclosure or deed in lieu of foreclosure appears to be subject to CFIUS jurisdiction. Although a commenter to the 2020 rule requested that lenders who foreclose on a property be exempt from CFIUS jurisdiction so long as the property is put back on the market shortly after foreclosure, no such change was made to the rule.⁴
• If a default or other situation creates a “significant possibility” that a covered transaction may result due to changes to a foreign person’s interest in the property, Lenders may file voluntary notices to CFIUS regarding such mortgage, loan, or other financing. CFIUS will consider whether such foreign person has made arrangements to transfer the covered real estate property rights to U.S. nationals or exempt real estate investors.⁵

Contingent Equity Interests

CFIUS may include contingent equity interests in its analysis of whether a transaction is covered, depending on the imminence of the conversion of the contingent equity interests, as well as the amount and type of rights acquired upon conversion. Lenders considering financing for properties within the boundaries set by the current CFIUS rule or the proposed rule should request disclosure of contingent equity interest holders as part of diligence.⁶

CFIUS in Action: Undoing a Closed Transaction

In May 2024, President Joe Biden issued an executive order requiring MineOne Cloud Computing Investment I L.P., a British Virgin Islands company that was ultimately majority owned by Chinese nationals, and its affiliates including a British Virgin Islands limited partnership and two entities organized in the State of Delaware (collectively, “MineOne”), to sell its interests in and remove equipment from real estate located within 1 mile of Francis E. Warren Air Force Base in Cheyenne, Wyoming (“Warren AFB”), which is a strategic missile base containing Minuteman III intercontinental ballistic missiles. MineOne acquired the property use for cryptocurrency mining in 2022, but CFIUS identified national security risks, including surveillance and espionage, due to the location’s proximity to Warren AFB and the fact that some of the cryptocurrency mining equipment was manufactured outside of the U.S. Although CFIUS  has mechanisms to negotiate with the parties of concern and enter into an agreement that is “effective and verifiable and enable[s] effective monitoring and enforcement to resolve the national security concerns posed by a transaction,”  in the MineOne situation, CFIUS determined that a satisfactory agreement would not be possible. The transaction had not been filed with CFIUS and was investigated as a result of a public tip.⁷

Proposed Rule: Broader CFIUS Reach

On July 8, 2024, the U.S. Department of Treasury issued a Notice of Proposed Rulemaking to further expand CFIUS’ coverage of such real estate transactions, meaning more transactions will be subject to CFIUS review. This proposed rule could add more than 50 military installations, across 30 states, to the existing list of installations under CFIUS’ jurisdiction.

The current CFIUS regulations governing real estate transactions identify a subset of military installations, but the proposed rule increases that list through the following changes:

• Expand CFIUS’ jurisdiction over real estate transactions to include those within a 1-mile radius around 40 additional military installations;
• Expand CFIUS’ jurisdiction over real estate transactions to include those within a 100-mile radius around 19 military installations;
• Expand CFIUS’ jurisdiction over real estate transactions between 1 mile and 100 miles around eight military installations already listed in current regulations;
• Update the names of 14 military installations already listed in current regulations; and
• Update the location of seven military installations already listed in current regulations.

The proposed rule would re-define “military installations” to include Space Force bases, stations, and major annexes thereof, Army depots, military terminals, Marine Corps installations, logistics battalions and support facilities, Naval bases and air stations, and major support activities and annexes.

Tips for Mastering a CFIUS Review

• CFIUS provides parties with a “voluntary review process” that allows CFIUS to issue a “No Action” decision protecting the parties on a going-forward basis, which is analogous to a safe harbor provision.
• Companies interested in taking advantage of the voluntary review process should seek a decision from CFIUS before the transaction has closed.
• Although CFIUS is supposed to provide such decision within 30 days, be prepared for a longer timeframe.
• If CFIUS determines that the transaction raises significant national security issues, it will take a more thorough investigation and may propose steps to mitigate national security concerns.
• Parties should expect that the more complexity involved in the transaction, the longer it will take CFIUS to make a decision.
• Despite the stated timeframes set forth in the regulations, it can take as long as an entire year for very complicated transactions to obtain CFIUS approval.

Real estate professionals should monitor this proposed rule carefully. If it becomes law, real estate professionals will be required to evaluate every real estate deal to determine whether a CFIUS review and the related notices to CFIUS are required or advisable. AGG offers the legal capabilities to assist in a CFIUS determination and, if necessary, pursue CFIUS approval.

[1] CFIUS defines a “foreign person” as a non-U.S. national, entity, or government, or an entity that a non-U.S. entity, national, or government can control. “Control” is broadly defined and doesn’t necessarily require a foreign person to own a majority interest in the U.S. business. CFIUS considers the entire ownership structure of an investor to identify foreign persons, including:

• A foreign national owning 100% of a U.S. business;
• Minority foreign shareholders with significant influence over a U.S. business;
• Foreign investors gaining control through other means, such as board representation, management decisions, or access to key technology or intellectual property;
• A U.S.-based investment fund controlled by one or more foreign general partners; and
• A U.S. branch of a non-U.S. parent entity.

[2] CFR § 802.212(b) – Covered Real Estate Transaction (Vol. 85, No. 12, p. 3168).

[3] CFR § 802.233 – Property Rights (Vol. 85, No. 12, p. 3173).

[4] CFR § 802.303 – Lending Transactions (Vol. 85, No. 12, p. 3164).

[5] CFR § 802.302 – Transactions that Are Not Covered Real Estate Transactions (Vol. 85, No. 12, p. 3174).

[6] CFR § 802.304 – Timing Rule for a Contingent Equity Interest (Vol. 85, No. 12, p. 3174).

[7] Executive Order of the President of the U.S., May 13. 2024.