CFIUS Finalizes FIRRMA Real Estate Transaction Rules

On January 13, 2020, the Department of the Treasury published final rules implementing the Foreign Investment Risk Review Modernization Act's (FIRRMA) provisions regarding certain foreign investments in real estate in the United States.¹ FIRRMA, which was enacted in 2018, provided the Committee on Foreign Investment in the United States (CFIUS) with expanded jurisdiction to review foreign investments in the United States and to recommend that the president block or otherwise interfere with such investments.²

Prior to FIRRMA, CFIUS had jurisdiction to review foreign investments in US real estate only in connection with foreign acquisitions of control over a US business. FIRRMA expanded CFIUS's jurisdiction to include certain transactions involving the purchase or lease by, or a concession to,³ a foreign person of certain real estate in the United States, even where there is no accompanying investment in a US business. Under the final rules, these transactions are termed "covered real estate transactions," and consist of the purchase, lease or concession to, a foreign party of "covered real estate" whether proposed or completed. There are two categories of "covered real estate": (i) real estate that "is located within, or will function as part of, a covered port," and (ii) real estate near US military installations or other property owned by the US government that "is sensitive for reasons relating to national security."

The final rules, which will be effective on February 13, 2020, establish provisions for the new Part 802 of Title 3 of the Code of Federal Regulations.⁴ Although published with certain modifications and clarifications, the final rules remain largely consistent with the Treasury Department's proposed rules, which were released in September 2019.⁵ In addition to the final rules, Treasury has included an Interim Rule defining "principal place of business," which was not a definition previously proposed but which Treasury believes will be helpful based on comments it received on the proposed rules. Because that definition was not previously proposed, Treasury is inviting comment on it now.

Below we describe key elements of the rules that have remained consistent with the proposed rules as well as significant changes, where present, in the final rules.

What Is the Scope of "Covered Real Estate Transactions"?

Types of Transactions Covered. As noted, the rules apply generally to transactions involving the "purchase, lease, or concession to," a foreign person of covered real estate, provided that the investing foreign person acquired certain "property rights" as part of the transaction. As was the case under the proposed rules, a transaction will be a covered real estate transaction only if a foreign person attains at least three of the following as part of the transaction:

• The right to physically access the real estate;
• The right to exclude others from physically accessing to the real estate;
• The right to improve or develop the real estate; and
• The right to attach fixed or immovable structures or objects to the real estate.

Treasury has retained its proposal that these rights be deemed to exist "whether or not shared concurrently" with another party. Thus, an otherwise covered real estate transaction will still be subject to CFIUS review even if it results in a US party holding title jointly with a foreign party as long as the foreign party is afforded at least three of the above fundamental property rights as a consequence of joint ownership. The final rules further define the term "transaction" to mean "any purchase or lease by, or concession to, a person of real estate, whether proposed or completed."

The rules expressly state that the extension by a foreign person of a mortgage, loan or similar financing arrangement for the purchase, lease or concession of covered real estate will not, by itself, constitute a covered real estate transaction. However, if it appears that, because of imminent actual default or other condition, there is a "significant possibility" that the foreign person may, by extending such a mortgage, loan or similar financing arrangement, actually obtain ownership of a lease for or a concession to the covered real estate as a result of the default or other condition, that would be a covered real estate transaction.

Covered Real Estate. As explained in our Advisory on the proposed rules, FIRRMA's expansion of CFIUS' jurisdiction with respect to investments in real estate is limited to real estate in or around specific sites—certain airports, maritime ports, and military installations and other "sensitive" properties owned by the US government. These sites are divided into two categories. The final rules contain specific provisions and definitions for each:

• Real estate within, or that will function within or as part of, covered ports. The rules capture most major and "joint use" airports—airports handling both civilian and military air traffic—as determined by the Federal Aviation Administration. Similarly, the rules define maritime ports to include the top 25 "tonnage, container, or dry bulk ports" as well as certain strategic seaports listed by the Department of Transportation. Under the final rules, the definitions of "airport" and "maritime" port have been combined into a new common term, "covered port." This definition identifies the relevant lists of these referenced sites and provides new provisions to clarify the associate timing elements of adding or removing sites identified as covered ports.⁶
• Real estate within certain distances of US military installations and other US government property. Consistent with the proposed rules, the final rules further divide covered real estate within certain distances of military installations and other government property that is sensitive for national security reasons into different categories:
  
  1. Real estate located within "close proximity" (i.e., one mile from the outer boundary) of a designated military installation or other government property.
  
  2. Property within an "extended range" (i.e., within 99 miles of the "close proximity" boundary and, where appropriate, no further than the territorial sea of the United States) of such specified property. The extended range category applies to various combat training, range and testing facilities and may also include adjacent airspace.
  
  3. Real estate in specified counties and other geographic areas near missile ranges located in Colorado, Nebraska, North Dakota, Montana, and Wyoming.
  
  4. Any part of certain identified property located within the territorial sea of the United States. Under the proposed rule, this distance was defined as 12 nautical miles. According to the Treasury Department, replacing the "12 nautical mile reference" with a reference to the territorial sea will provide greater clarity to the public.

The final rules include a list of military installations and other qualifying US government property and their corresponding vicinity restrictions in an appendix. According to the final rules' preamble, Treasury will be creating a web-based tool to help the public better understand the scope of these geographically significant areas. This tool could meaningfully facilitate decisions of potential foreign investors in US real estate as they consider the possible risk of CFIUS concerns about particular investments.

Exceptions and Other Carve-Outs. As did the proposed rules, the final rules set out exceptions to otherwise covered real estate transactions, based on the nationality of the foreign party involved or the type of transaction involved. The final rules identify specific foreign states as relevant to these exceptions and also provide other clarifications as to the limitation and application of these exceptions and other carve-outs. Specifically:

• Excepted real estate investors and excepted foreign states. As under the proposed rules, an "excepted real estate investor" is a foreign party that has a "substantial connection" (according to certain factors including nationality and place of incorporation) to an "excepted real estate foreign state," and has neither violated certain US laws nor has a history of noncompliance in prior CFIUS-related transactions. Under the final rule, the countries selected by CFIUS as initially deemed to be "excepted foreign states" are: Australia, Canada the United Kingdom. The status of these countries as excepted foreign states will be reviewed for the purposes within the next two years and subject to a renewed determination in February 2022.
• Urbanized areas. Unless the property is within "close proximity" of an identified military installation or is within, or functioning as part of, a covered port, the final rules provide an exception for otherwise covered real estate transactions that involve real estate located within an "urbanized area" or "urban cluster." The terms "urbanized area" or "urban cluster" are defined by the Census Bureau based on population density. This means that most major cities—including Washington, DC—also fall under this exception despite their proximity to major governmental and military centers.
• Individual housing units. Like the proposed rules, the final rules provide an exception for the purchase, lease or concession of a single "housing unit"—used for individual or single-family occupancy. The exception also includes any fixtures and adjacent land that are incidental to the intended use of the property as a housing unit. To be considered incidental, the size and nature of a particular housing unit's fixtures and land must be "common for similar single housing units in the locality in which the unit is located."
• Retail trade, accommodation or food service sector establishments. Another exception under the final rules applies to the purchase, lease or concession of covered real estate located within or as part of an airport or maritime port where the terms of the transaction restrict the use of the covered property to retail trade, accommodation or food service.
• Limited commercial office space. The final rules also exempt the purchase, lease by or concession to, a foreign party of commercial office space. The exemption is limited, however, to transactions where, upon completion of the transaction, the foreign party does not, in the aggregate, (1) hold, lease or have a concession with respect to more than 10 percent of the building's overall square footage, or (2) represent more than 10 percent of the total number of tenants in the building.
• American Indian and Alaska Native Lands. The rules also exempt transactions involving real estate is owned by specified Alaskan Native groups or held in trust by the US for American Indians, Indian tribes, Alaska Natives, and Alaska Native entities.
• Foreign air carriers. As a new exemption, the final rules provide that real estate transactions involving foreign air carriers are not subject to CFIUS oversight to the extent that a lease or concession is related to a foreign party's activities as a foreign air carrier and such activity is performed by a foreign air carrier that the Department of Homeland Security's Transportation Security Administration has previously vetted.

What Filing Procedures Apply to Covered Real Estate Transactions?

As discussed in both our initial Advisory⁷ and our continued coverage of the proposed rules under FIRRMA,⁸, the statute significantly enhanced CFIUS' role in protecting national security by making filings with CFIUS mandatory with respect to certain foreign investments in US businesses. Covered real estate transactions, however, are not subject to that mandate. Thus, whether to submit a filing with CFIUS regarding a covered real estate transaction is a matter of discretion for the parties (absent a specific request from CFIUS for a submission).

Although parties to covered real estate transactions are not required to make any filing with CFIUS, if they do choose to file, the rules give them the option of filing a short-form "declaration" rather than the longer, traditional form of "notice." While preparing a full notice can be a fairly time-consuming and burdensome process, preparing a declaration is relatively simple. The declaration form is posted online as a fillable PDF document that is easy to navigate and requires minimal prose. Further, CFIUS is required to review declarations within 30 days (compared to the 45-day review now applicable for notices). Thus, where a transaction is fairly straightforward and does not seem to present a serious national security risk, filing a declaration may be an attractive option. The risk is that if CFIUS determines it cannot conclude its review during the 30-day declaration review period, it can choose, among other options, to request the parties to file a notice, which will mean 30 days will have been added to what might have been the review period for a notice in the first place, or not reach any conclusion by the end of its 30-day review, giving the parties no conclusive answer as to whether the president might exercise his authority to interfere with the transaction. The final rules also clarify that CFIUS may request that a party file a written notice if CFIUS has reason to believe that the transaction may raise national security considerations, regardless of whether a prior declaration was properly submitted.

As noted, the procedures for CFIUS review of transactions involving foreign investment in covered real estate transactions are codified in a new part of the Code of Federal Regulations, 31 CFR part 802, separate from the current CFIUS regulations codified at 31 CFR part 800.

To avoid potential classification issues, the final rules clarify that a covered "control over a business" transaction involving the purchase, lease, or concession of covered real estate is not considered a "covered real estate transaction," and parties to such "control" transactions should follow the filing procedures set forth in 31 CFR part 800. Although FIRRMA gave CFIUS authority to impose fees for making filings regarding both types of transactions, the final rules do not include provisions regarding such fees—Treasury intends to publish a separate rule regarding fees at a later date.

Consistent with CFIUS existing rules, the rules also set out significant penalties to be imposed under the new 31 CFR part 802. Like the rules governing other covered transactions in part 800, the rules on covered real estate transactions establish penalties up to $250,000 per violation for parties who make a "material misstatement or omission" in a declaration or notice or otherwise make a false certification.

Principal Place of Business—Interim Rule

As discussed above, in addition to the final rules, Treasury has published an interim rule defining "principal place of business," which also is effective as of February 13, 2020. The term "principal place of business" plays a key role in determining whether a particular transaction is a covered real estate transaction, including determining whether an entity is "foreign" and whether the "excepted foreign state" exemption applies. Under the new interim rule, the term is defined as "the primary location where an entity's management directs, controls, or coordinates the entity's activities, or, in the case of an investment fund, where the fund's activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent." Comments on this definition must be received within 30 days after the interim rule's publication in the Federal Register.

Conclusion

The final rules also add important explanations and examples to those provided in the proposed rules, which give additional insight into how CFIUS intends to review covered real estate transactions. Careful consideration of those explanations and examples can prove helpful for parties as they evaluate their planned approach to such transactions.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.