Treasury Proposes Rule to Expand CFIUS’s Real Estate Jurisdiction

The US Department of the Treasury on July 8, 2024 proposed updates to the Committee on Foreign Investment in the United States’s (CFIUS’s) regulations that seek to expand the list of military installations for which proximity can create CFIUS jurisdiction. Companies or investors contemplating transactions that involve foreign access to real estate near these military facilities may need to take proactive steps to assess CFIUS jurisdiction and proceed accordingly.

Importantly, the Notice of Proposed Rulemaking (NPRM) reflects an update to the locations that trigger the Committee's current jurisdiction, rather than a significant expansion of its underlying jurisdiction over real estate transactions. It does not alter the voluntary system for covered real estate transactions or otherwise substantively modify the notification process. However, the NPRM does indicate—especially coming on the heels of President Joseph Biden’s May 13, 2024 divestiture order against Chinese national-owned MineOne Partners Ltd.—that CFIUS may be focusing more heavily on real estate transactions and responding to increased concerns about foreign acquisitions near a broader array of military facilities.

Summary of Changes Under the Proposed Rule

Since implementation of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS has had jurisdiction to review certain transactions involving “covered real estate.” [1] Under CFIUS’s existing real estate authorities, this includes transactions involving the following:

• Real estate within one mile of the boundary of any military installation, facility, or property located on Part 1 of Appendix A to Part 802
• Real estate within 100 miles of the outer boundary of any military installation listed on Part 2 of Appendix A to Part 802 [2]

The NPRM proposes updates to CFIUS’s “covered real estate” regulations through changes to Parts 1 and 2 of Appendix A to Part 802 (i.e., the List of Military Installations and Other US Government Sites). [3] Specifically, the NPRM proposes the following changes:

• Add 40 installations to Part 1 of Appendix A to Part 802
• Add 19 installations to Part 2 of Appendix A to Part 802
• Move eight installations from Part 1 to Part 2 of Appendix A to Part 802
• Consolidate (i.e., remove) three installations (one in Part 1 and two in Part 2) in Appendix A to Part 802
• Update the address of seven military installations
• Amend the names of 14 military installations included in Appendix A to Part 802

Anticipated Effects

While no changes will take effect immediately, companies should consider taking certain proactive steps in anticipation of these updates. In particular, businesses should ensure that any cross-border real estate investments include robust CFIUS reviews so that factors of potential concern to the Committee can be evaluated. CFIUS jurisdiction over real estate transactions may, for example, arise as part of a larger transaction, and not only when the transaction is purely for real estate.

While real estate transactions remain part of the voluntary CFIUS process, we may also see a heightened outreach on real estate transactions through CFIUS’s non-notified process, as discussed in more detail below. Companies and investors should be prepared to respond to this outreach if they do not elect to make a CFIUS filing, as well as to assess whether these anticipated changes will alter the risk calculus regarding voluntary filings.

Preparation Considerations

First, the NPRM does not include a proposed effective date or other time by which it would be implemented. The NPRM indicates that comments will be solicited for 30 days following the NPRM’s publication in the Federal Register, which means the updates are unlikely to take effect before mid-August, given that Treasury will need to review and respond to each comment. An August implementation is unlikely unless Treasury adopts no comments and publishes the NPRM as currently written as a final or interim final rule.

When CFIUS last updated the list of installations included at Appendix A to Part 802 in 2023, approximately three and a half months passed between the publication of the proposed rule and the implementation of the final rule codifying the change. [4] While final timing remains unclear, it would be reasonable to expect CFIUS to proceed along a similar timeline, in which case the proposed rule could be implemented at some point during the fourth quarter of 2024.

Second, the NPRM reflects continued CFIUS interest in real estate transactions, even though, until now, real estate matters have comprised a fairly small portion of the CFIUS docket. The most recent CFIUS prohibition that was based on real estate jurisdiction may herald the start of further attention to this area. In May, President Biden ordered Chinese national-owned MineOne, which had established an advanced cryptocurrency operation in close proximity to the Francis E. Warren Air Force Base in Wyoming, to (1) divest of its acquired real estate; (2) remove all equipment that was installed, stockpiled, stored, deposited, or affixed; and (3) remove all improvements made to the real estate.

Further, MineOne was prohibited from physically or otherwise accessing the real estate, equipment, or improvements except to the extent that such access was consistent with carrying out its legal obligations under the order. Coupled with ongoing public congressional interest in real estate-related national security concerns, the advent of more real estate deal reviews would not be unexpected.

Third, some states have also started regulating transactions involving purchases of US real estate by foreign persons—often with an emphasis on China—based to some extent on those states’ assessment that CFIUS’s real estate jurisdiction does not adequately address these transactions. Although constitutional issues of federal preemption have generally been avoided in the court decisions thus far, CFIUS’s efforts to be more forward leaning in this area may also be geared toward tempering state actions and thereby preventing potentially disparate results between exercises of federal and state jurisdiction.

Fourth, and as noted above, it would be prudent for parties to begin examining whether and how pending and contemplated transactions may be affected by the proposed changes. For any transactions that might occur after CFIUS adopts the updated list of military installations (i.e., if there is a possibility that closing might not occur until after the final rule issues), CFIUS due diligence should be based on the revised list proposed by the NPRM. Otherwise, transactions that were previously not subject to CFIUS real estate jurisdiction but become subject to the expanded jurisdiction could, if not notified to CFIUS through a filing, be subject to CFIUS requests for review post-closing by the Committee through its non-notified process.

Although real estate transactions remain subject only to voluntary filing rather than mandatory filing, the non-notified risk is particularly acute with respect to real estate transactions that involve parties from “high-risk” countries and/or those that appear to be close to sensitive military facilities. For example, the published order directing MineOne to divest the real estate it had acquired stated that the transaction was not filed with CFIUS until after CFIUS’s non-notified transaction team investigated as a result of a public tip.[5]

Finally, to keep the proposed rule in context, the NPRM reflects an update of, rather than a wholesale change to, CFIUS’s existing authorities. As contemplated by FIRRMA, the list of sensitive military installations at Appendix A to Part 802 is constantly evaluated by the US Department of Defense and, where appropriate, updated to address changes in circumstances. Although more significant changes to CFIUS real estate jurisdiction could occur in future executive branch rulemaking or congressional legislation, this latest development reflects an incremental change to the Committee’s authority and not a major sea change.