Real estate investors and their counsel who were worried about the slew of new rules for foreign investment in real estate in the United States may be relieved that the final regulations, which take effect on Feb.13, came in more narrowly drafted than some had feared.

Ama Adams, a partner at Ropes & Gray in its anti-corruption and international risks group, said, "CFIUS is new for real estate investment management firms who may be bringing on foreign investors. We have had a lot of calls [from clients] trying to understand what that means for their business or investment activities now."

The regulations, which were enacted under the Foreign Investment Risk Review Modernization Act of 2018, expanded the scope of investment transactions requiring a mandatory filing for review by the Committee on Foreign Investment in the U.S., the interagency panel at the Treasury Department. They also introduced a stiff penalty for failing to file a mandatory notice for an investment that requires one. The penalty can be up to and including the value of the investment. 

But real estate reviews under CFIUS, while broader than before, remain voluntary under the new rules, the lawyers said.

The U.S. Treasury Department regulations also "whitelisted" the United Kingdom, Australia and Canada as countries whose investments are generally excepted from the requirement for national security reviews of covered transactions involving noncontrolling investments, because regulators decided that those countries have regulations that are similar to the U.S. The rules as drafted leave the door open for other countries to join the excepted list, or for excepted countries to drop off the list, depending on their actions. 

But while the Treasury Department has whittled down some of the final regulations from the initial proposals, there is still potential for unpleasant surprises for real estate investors under 31 C.F.R. Part 802, the 31 pages of final rules governing real estate transactions under FIRRMA, lawyers warn. 

For example, while real estate reviews aren't mandatory, parties could still be required to submit to a review by the CFIUS panel if the parties don't file voluntarily and the committee finds a reason to scrutinize the deal, said Les Carnegie, co-lead of the CFIUS and U.S. national security practice group at Latham & Watkins, and associate Lauren Talerman. The panel could even recommend that the U.S. president order the deal unwound.

That happened in 2012 under previous CFIUS regulations when President Barack Obama ordered Ralls Corp. to divest its acquisition of a wind farm project in proximity to a Defense Department installation in Oregon, which resulted in the only CFIUS lawsuit in history. It ultimately ended in a 2015 settlement. 

So in-house counsel at foreign companies, and U.S. companies with foreign investors in real estate transactions that potentially could be covered by the new rules, need to pay attention.

"It is not a mandatory filing requirement but the CFIUS considerations should absolutely be part of the purchase or lease checklist," Carnegie said. Following are five takeaways from CFIUS lawyers:

1. A foreign company doesn't need to acquire a U.S. company to be covered by the new rules for CFIUS review of a real estate transaction.

FIRRMA expanded CFIUS' jurisdiction to include transactions involving "foreign persons" in any purchase, lease or concession of real estate, including real estate investment trusts (REITs), regardless of whether a U.S. business is involved.

"Historically, the real estate transactions were only subject to jurisdiction where they could be subject to control by a foreign person over a U.S. business," Adams said. "Now, you don't need an acquisition of a U.S. business. It could be the purchase or lease of property."

The new rules taking effect on Feb. 13 are intentionally much broader than earlier regulations and even include the purchase of barren land. "Purchase of land may be subject to jurisdiction if proximity rules apply," Carnegie said. 

2. The panel can only review deals that give investors three of four property rights. 

They are: 1) the right to physical access to the property; 2) the right to exclude others from physically accessing it; 3) the right to improve or develop the property; and 4) the right to affix structures or objects to it. For that reason, one way to deal with the new rules may be to limit foreign investors' property rights in a transaction. 

3. For the first time, the Treasury Department is providing investors with definitions around close proximity and extended range.

The new regulations contain a lot of specific rules covering proximity to military and other sensitive government installations, as well as maritime ports and airports, but CFIUS has said the public can use a web-based tool at the Census Bureau called TIGERweb.geo.census.gov until the Treasury Department comes up with its own interactive tools, which are planned.

"These new real estate rules and applications are difficult to apply," Carnegie said. "You have to have a good understanding of the map, which is where this new tool that the government is developing may be helpful to the public. The other thing is that once you are caught from the map you have to figure out whether you are released from the jurisdiction, like single-family housing or office space, or an urbanized area as defined by the regulations. The overlap of the map and these exceptions is something the regulated community is going to find difficult at first." 

4. There are fairly broad exceptions under the new rules for single-family housing units and commercial office space.

Latham's Talerman also emphasized that the real estate rules are a "catch and release," being caught by the map or released by the rules with respect to single-family homes, urbanized clusters and other exceptions.

5. It remains to be seen whether the D.C. metro area and other parts of the country with dense concentrations of government and military facilities will be more affected by the new real estate rules despite the exceptions for "urban clusters" and "urbanized areas" in the regulations.

"We really don't know, but it is definitely a valid point, because of the nature of this area and where the federal government is located. You are going to find a lot of sensitive government installations sprinkled throughout the D.C. metro area," said Adams.

As a general bit of guidance, Adams said general and in-house counsel "should be assessing the types of real estate transactions they are engaging in and if they are subject to the new rules and national security issues and make sure that certain property rights are not automatically afforded to people, but make sure that giving them rights doesn't raise a CFIUS issue and front-load those discussions. If they want those rights, they have to do more due diligence around those issues. Get sales and marketing teams to understand that this is another issue they need to be thinking about."

Carnegie said counsel for foreign investors should have had CFIUS very high up on their deal checklist already, and now as a result of these new rules "in-house counsel for foreign investors and foreign companies should have a purchase or even a lease be something that goes through CFIUS considerations."

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