The Committee on Foreign Investment in the US has become increasingly interested in reviewing real estate transactions in recent years. While CFIUS reviews of foreign acquisitions of ‘crown jewel’ assets have been covered widely in the media, CFIUS is also interested in reviewing acquisitions of lower profile assets, such as apartment communities, hotel properties, and other industrial or commercial facilities.
CFIUS is an interagency committee of the US government empowered to review transactions that will result in a foreign person controlling a US business, to evaluate the potential effect of the transaction on national security. While a CFIUS review is technically voluntary, in some cases involving sensitive assets or higher-risk acquirers it is effectively mandatory.
While the decisional metabolism of CFIUS in the Trump administration is still working itself out, this trend shows no sign of abating. As a result, it’s wise for real estate investors, owners and their financial advisors to understand how a prospective real estate transaction may implicate CFIUS concerns and affect a prospective transaction’s feasibility.
In the CFIUS context, national security risk is generally a function of the perceived threat of the foreign buyer and the vulnerability of the US assets. While CFIUS’s review takes into account all of the relevant facts about a transaction, these three basic questions should help jumpstart the analysis as to whether the real estate assets at issue bear indications of national security vulnerability for CFIUS purposes:
1. Where is the property?
A real estate asset may be deemed sensitive because it raises ‘co-location’ concerns in being proximate to a sensitive US government site, such as a data center for a government agency, a military training facility, an electrical grid asset or airspace. Sometimes this co-location risk is obvious upon examination, such as an apartment community located across the street from a US military base. However, carefully evaluating this vector of risk with a seasoned advisor with national security experience is vital, particularly since the most sensitive US government facilities are not widely known and may not appear on a map.
Moreover, theories about co-location risk are becoming more nuanced. In this connection, it’s worth noting that at least one member of the US Senate has considered proposing a bill that would see the co-location analysis performed by CFIUS be formally mandated as a matter of statutory law.
2. Is the property used by US government personnel or for the provision of US government services?
Physical or remote access by a foreign person to a real estate asset that is used by US government personnel, or for the provision of US government services, is another classic vector of CFIUS risk. For example, the presence of US government agency tenants on a site will automatically elevate the CFIUS risk of a transaction.
A recent Government Accountability Office report highlighted potential national security risks arising from foreign ownership of high-security space leased to federal agencies, suggesting that the issue is top of mind for the US government. Moreover, certain private tenants may raise CFIUS risk if physical or remote access to the property by the foreign buyer could provide a vector for theft of important US intellectual property with defense or other sensitive applications, or theft of sensitive personal identifier information. The CFIUS risk analysis for a prospective transaction should also account for whether any tenants collect and store PII as a matter of course, such as healthcare providers or payment processors.
3. What infrastructure is located on-site?
Irrespective of an asset’s location and tenants, a property may also attract CFIUS scrutiny based on the telecommunications or cyber infrastructure located on-site. It is not uncommon for high-rise properties and even churches to hold licenses from the Federal Communications Commission for wireless network communications, or to rent space to telecommunications providers to host cell towers. Fiber optic networks and data transmission lines located on a property can similarly elevate risks of cyber-intrusion, and are items of interest to CFIUS.
While CFIUS takes an expansive view of national security risks, including with respect to real estate transactions, in most cases these risks can be resolved without significant detrimental impact on a potential transaction. What is essential, however, for a successful transaction – with a minimum of CFIUS disruption – is thoughtful and timely advice and careful planning.