US government to more carefully scrutinize foreign RE buys

Kirkland & Ellis’ head of national security cautions a pan-agency governing body that reviews foreign investment across industries could change its focus under the new president.

Real estate owners selling properties from trophy Manhattan office buildings to suburban, budget hotels should be aware of greater government scrutiny on foreign buyers, according to Mario Mancuso, head of New York-based law firm Kirkland & Ellis’ national security practice.

Mancuso led a Friday media call focusing on the evolution of the Committee on Foreign Investment in the United States (CIFIUS), a pan-governmental group that reviews deals across industries subject to meaningful foreign involvement. CIFIUS, which comprises about 16 agencies ranging from the Department of Defense to the Department of Commerce, has focused more on real estate in the last two years and will likely continue its attention on the asset class under President Donald Trump’s administration, Mancuso said.

In the last year, for example, Blackstone stopped the sale of one hotel in its Strategic Hotels & Resorts portfolio that Beijing-based Anbang Insurance Group agreed to buy in March because of CIFIUS concerns, PERE previously reported. Blackstone is keeping the Hotel del Coronado after the US government raised questions about security issues for the property, located outside of San Diego near a US Naval base.

Trump’s two campaign slogans ‘Make America Great Again’ and ‘America First’, as well as his campaign promises, offer a window into how CIFIUS could evolve under new leadership, Mancuso said.

Previously, CIFIUS focused on deals across industries that related to national security issues, such as the Hotel del Coronado’s proximity to the military. Other real estate issues have included office buildings with rooftop telecommunications towers leased to the Federal Communications Commission, considered sensitive because of the potential to disrupt telecommunications, and even local hotels that have government contracts with the military, because of the risk of access to confidential personnel information and itineraries, Mancuso said.

“Real estate investors have to think about co-location and the other ways they use the properties,” he said. “Real estate, which has often been treated as benign, has to be carefully thought about.”

Now, with Trump’s focus on American jobs, Mancuso said CIFIUS could link national security to economic and employment issues, with unpredictable consequences for real estate and foreign investment across industries.

The impact on private equity funds, both real estate-focused and traditional vehicles, is also unclear. The government may, for example, examine foreign limited partners in commingled vehicles, though the CIFIUS regulations are written for operating companies.

Chinese companies, in particular, have been a past focus for CIFIUS investigations across industries. The new administration is unlikely to change this emphasis, given Trump’s heated remarks about China on the campaign trail and in recent weeks, Mancuso said.

“China is in a category of one for CIFIUS purposes, largely because the US has a complicated relationship with China,” he said.