A Bigger Backyard for CFIUS? Part I: Bill proposes expansion of real estate transaction reviews

Today, CFIUS’s real estate jurisdiction is frequently more of a curiosity than an ongoing concern for landlords. But a recent bill in Congress would widen the scope of national security by dramatically expanding CFIUS’s remit in real estate and economic analysis. 

The proposed Protecting Against Foreign Adversary Investments Act of 2024 (PAFAIA) is only in its early stages, and as discussed in this post, raises a number of implementation questions. But if enacted, there would be a paradigm shift, requiring mandatory and potentially retroactive filings for real estate transactions. Supported by sponsors from both parties, parallel versions of the bill are being considered in both houses of Congress, and in light of other recent legislation, may stand a greater chance of passage than most CFIUS-focused bills.

China in the spotlight

Politically, all eyes have been on Chinese investment. Headlines for the last year have abounded with speculation concerning the resolution of Trump’s 2020 decision to block ByteDance’s acquisition of Musica.ly and a separate bill in Congress that would force divestment of or ban TikTok in the United States. In real estate specifically, CFIUS determined it lacked jurisdiction over Fufeng’s plans to build a corn-milling plant in Grand Forks, prompting a May 2023 rule change to add Grand Forks Air Force Base and other military installations to the CFIUS regulations. In the same vein, Congress recently passed legislation formalizing case-specific participation by the US Department of Agriculture (USDA) in CFIUS cases—a standing practice of CFIUS for years—and requiring USDA notification to CFIUS of agricultural land transactions that may raise national security concerns, potentially adding to the number of “non-notified” transactions reviewed by CFIUS.

Perhaps dissatisfied by this response, PAFAIA would add additional restrictions. The statute’s provisions are nominally directed at “foreign entities of concern” (FEOCs) for which the most common trigger is that an entity is “owned by, controlled by, or subject to the jurisdiction or direction of” the governments of China, Russia, North Korea, and Iran, of which only China would be relevant since it is not subject to wide-ranging sanctions. While perhaps new to landlords, dealmakers should be somewhat familiar with the FEOC definition already, as it is also used in the incoming foreign subsidies disclosures for merger control filings.

A paradigm shift for real estate transactions

Real estate filings currently constitute a miniscule portion of CFIUS’s overall workload, reflecting their voluntary nature and the relatively narrow coverage of the CFIUS rules. Unlike CFIUS’s jurisdiction over corporate transactions, CFIUS’s real estate jurisdiction is limited by the proximity of a subject property to listed sensitive sites that are either government installations or training areas, or the locations of such facilities. Several exceptions then apply, most notably for property that is a single housing unit or within an urbanized area. 

The PAFAIA would change this paradigm entirely for FEOCs (and as noted above, especially for parties from China). The proposed approach, which lacks these proximity requirements entirely, would require FEOCs to make mandatory filings for real estate valued at over USD 1 million or exceeding 100 acres - not just for the transaction at hand, but also an entity’s previous three years of US real estate transactions. The existing exceptions for single housing units and property within an urbanized area remain, though their interaction with the aggregation would need to be clarified through regulations. Will a buyer from China file when separately acquiring a series of single housing units totaling more than 100 acres or with an aggregate cost of more than USD 1 million? What if the buyer has previously purchased a USD 1 million property in an urbanized area? 

The mandatory filing requirement also cuts through an existing exception from mandatory filings for certain American-managed funds. Since PAFAIA is directed at real estate transactions by FEOCs, is this meant to capture these funds’ sales of real estate? Or are the bill sponsors further implying that certain excepted funds may nevertheless be “subject to the jurisdiction” of foreign governments because of their structure or holdings?

New burdens on landlords and sellers?

These new thresholds may impose significant new burdens on landlords and sellers in transaction diligence. Previously, the voluntary nature of real estate filings meant landlords only needed to engage with CFIUS if they were called in, allowing them to avoid the burden of CFIUS compliance in nearly all cases. 

Mandatory filings change this dynamic. The penalty for missing a mandatory pre-closing CFIUS filing can be up to 100% of the transaction value. Since the regulations are silent as to who would be responsible for payment, the prudent approach has been to view this as a joint and several liability (i.e., either party can be on the hook for the entire amount). If this provision is extended to real estate transactions, the aggregation rules may create tremendous exposure for landlords and sellers.

For example, a transaction may be under both the USD 1 million and 100-acre thresholds, but still trigger a filing because of a buyer’s past real estate purchases. However, a seller will not be able to identify such a transaction without knowing the buyer’s nationality and the buyer’s transaction history—information that might not be available through real estate transaction records and that a buyer may not wish to disclose (or may want to obfuscate through use of separate but affiliated entities). The result is that landlords and sellers must undertake burdensome due diligence or risk a large civil penalty—to say nothing of the cost and time required for a CFIUS filing and potential mitigation conditions. 

And the risk of a divestiture down the line can cause havoc for all parties. Buyers and lessees may spend considerable capital on preparing a property for use, some of which will inevitably be lost if forced to vacate earlier than anticipated. In addition, sellers and landlords may be left needing to do clean-up—including environmental remediation, which is often not a trivial matter if the property was used for industrial purposes. Combined with the additional diligence, these compliance costs may push property owners to turn elsewhere, with potentially discriminatory effects. 

Reporting

PAFAIA would also require the government to prepare two notable reports. First, the Director of National Intelligence must compile an annual report on the national security risks posed by FEOC use of US real estate. Notably, the report would seem to require an assessment of all real estate transactions within CFIUS’s jurisdiction since CFIUS was established, including past unexamined transactions. We wonder how the Office of the Director of National Intelligence will compile this report, since property records do not typically track the nationality of the parties.

More ambitiously, the bill also directs Treasury to investigate how it may apply this new coverage to past transactions and conduct retroactive mitigation and divestment. Three questions for Treasury to consider:

• What will due process require? The 2012 Ralls decision held that CFIUS is subject to due process constraints, but balancing in national security cases tends to favor the government. 
• Are there legal constraints on retroactive effects? CFIUS penalties are civil in nature, but the Ex Post Facto clause of the US Constitution is generally held to prohibit crimes.
• Is the Takings Clause of the US Constitution applicable to retroactive divestitures?

Next up

The real estate changes proposed in PAFAIA are hardly the whole story. In Part 2 of this series, we will discuss how PAFAIA seeks to expand CFIUS’s concept of “national security” and add provisions directing federal coordination with state-level foreign investment review, as well as our evaluation of PAFAIA’s prospects for passage. Stay tuned!