The Committee on Foreign Investment in the United States (CFIUS) finalized a previously proposed rule expanding both the types of military installations covered by its regulations governing reviews of real estate transactions and the number of military installations subject to those reviews. The new rule, which impacts transactions entered into on or after December 9, 2024, continues the trend toward reviews of more real estate transactions based on their proximity to a growing list of military installations deemed “sensitive,” and also allows for greater growth by changing the definition of “military installations” that can become subject to these regulations in the future.
The US Department of the Treasury on November 1, 2024 issued a Final Rule updating some of CFIUS’s regulations. The Final Rule expands CFIUS’s authority to review certain transactions involving US real estate by expanding and revising the list of military installations that could trigger CFIUS review. While the same set of regulations also permits review of real estate purchases within a certain radius of air and maritime ports, the Final Rule will not make any changes to the ports. In addition, and likely in response to public commentary, the Final Rule would broaden the types of military installations that could be added to the list in the future.
In the discussion of the Final Rule, effective December 9, Treasury clarified that the Final Rule would not apply to a completed transaction or a “binding written agreement, or other binding document, establishing the material terms of the transaction” that is executed before December 9. Transactions that have only progressed to a letter of intent or other nonbinding agreement could still be reviewed if a binding agreement is not executed before the effective date.
The publication of this Final Rule is one of several new facets in a growing web of regulations of foreign investment at the federal and state levels. Recently, in response to national security concerns over “food security” and the foreign purchase of US farmland, the US Secretary of Agriculture was added as a non-permanent member of CFIUS and participates in reviews of transactions that involve agricultural land, biotechnology, or the agriculture industry. Augmenting these authorities, approximately half the states have instituted some regulation of foreign investment, with some facing preemption and other issues challenging their validity.
Although the Final Rule codifies an expansion of CFIUS’s jurisdiction at a time when regulation of foreign investment continues to change quickly, CFIUS’s fundamental processes and foreign investors’ mandatory filing obligations with CFIUS remain the same. Most importantly, filing with CFIUS for real estate transactions remains voluntary, although as with other voluntary filings, not filing may result in CFIUS pulling in a transaction for review post-closing if it determines that either mitigation conditions or divestment may be warranted due to national security risk. Just this past May, President Joseph Biden ordered the divestment of real estate purchased by Chinese cryptocurrency mining company MineOne because CFIUS determined it was too close to Francis E. Warren Air Force Base and there were no adequate methods of mitigation. Given the evolving regulatory landscape, foreign investors must remain diligent and be proactive in assessing potential challenges in US foreign direct investment (FDI).
The Final Rule comes after the Treasury Department published a Notice of Proposed Rulemaking (NPRM) on July 8, 2024 that added 59 military installations to Appendix A of the regulations and modified the definition of “military installation.” Appendix A of Part 802 lists the military installations and US government sites that the US Department of Defense (DOD), for the purpose of CFIUS, believes are sensitive for national security reasons. To exercise its jurisdiction and review a transaction under its real estate authorities, CFIUS must establish several facts, including that the real estate that is the subject of the purchase, lease, or concession is within a certain distance of DOD-prescribed installations or areas.[1] The NPRM proposed to modify, and the Final Rule will modify, this element of CFIUS’s criteria by expanding the list of DOD-prescribed installations.[2]
The NPRM proposed the following additions and edits:
Consistent with the NPRM, the Final Rule will also change the definition of “military installation” in the regulation to include more types of facilities and allow CFIUS to add further installations to Appendix A in the future. In addition to all the military installation types already included in the definition, the new definition will add the following:
This change further complicates real estate purchases for foreign investors, as it expands the range of installations across the United States that may be added to CFIUS’s list in the future.
Treasury received more than 40 comments on the NPRM and ultimately made no changes based on these comments. Some commentors urged Treasury to prohibit foreign purchasers from acquiring any land in the United States, or to restrict foreign companies from building on real estate within 100 miles of a military installation. Others commented on the prior exclusion of particular military installations that were added in the NPRM. In these cases, Treasury declined to retroactively apply the new authorities to transactions that pre-dated the regulatory update and to act based on any specific comments regarding particular transactions. Citing “the United States’ longstanding open investment policy” and CFIUS’s statutory authority, Treasury responded that it relies on a risk-based approach and would take action “with respect to certain foreign investments that pose national security concerns based on a transaction-specific assessment” and declined to implement any of the suggestions.
Treasury did note that it received some comments about state laws regulating foreign investment and the relationship between foreign investment and civil society. In the past several years, nearly half of US states passed laws regulating foreign investment and many more proposed bills. Some of these laws have resulted in civil rights cases, as the laws have allegedly interfered with certain individual’s rights to purchase property, and some have argued that these laws are preempted by current CFIUS regulations.
Preemption is the constitutional doctrine that federal law can nullify state law if the state law conflicts with the federal law but determining when laws conflict is debated. This principle has been interpreted by some courts to invalidate state laws when the federal government regulates a field so extensively such that it intends to preempt and conflict with state law by being the sole source of authority in that field. National security and international affairs have traditionally been areas that were occupied exclusively by the federal government, but these state laws are challenging that view.
In Florida, Chinese citizens and the ACLU challenged a state law prohibiting residents from China that are non-US citizens from purchasing property. The plaintiffs made several arguments, including that the existence of CFIUS and the expansion of its jurisdiction over some real estate transactions indicate that, in the interest of national security, the federal government has articulated a process and policy for foreign investment in real estate. Florida countered that regulation of individual land ownership is an issue that the state is best positioned to address and argued against federal preemption, as the state law does not conflict with CFIUS’s authority nor has CFIUS completely occupied the field.
In February 2024, the US Court of Appeals for the Eleventh Circuit granted, in part, the motion for preliminary injunction for two of the plaintiffs, finding that they showed “a substantial likelihood of success” on their claims that portions of Florida’s law are preempted by the federal foreign investment review regime. This case has been fully briefed and argued, and a decision is expected soon. Lawmakers in other states are watching this litigation and others in considering whether to pass similar measures.
In response to comments seeking CFIUS action regarding state-level foreign investment laws, CFIUS declined to make any regulatory changes, noting that the regulations are not the appropriate venue for such actions and reiterating that it would continue to review purchases only on a case-by-case basis using a risk-based approach to assess transactions.
Despite these changes, notification of real estate purchases remains voluntary, and CFIUS gave no indication that this would change anytime soon. Thus, the decision on whether to make a CFIUS filing is subject to an individualized risk calculus. For investors from “high-risk” countries and/or those that own or are seeking to purchase real estate close to military facilities, notification and filing may be particularly important.
The publication of the Final Rule comes at a time when further development of CFIUS’s regulations and statutes is expected. Just this fall, the Protecting American Agriculture from Foreign Adversaries Act of 2024 passed the US House of Representatives, which would direct CFIUS to determine whether reportable “agricultural” land transactions should receive national security reviews. Agricultural land, as defined in the Agricultural Foreign Investment Disclosure Act (AFIDA) is land that is currently used (or has been used in the past five years) for farming, ranching, or timber production, excluding land under 10 acres that produces less than $1,000 in annual gross sales value. Currently, reporting agricultural land transactions is a process entirely separate from CFIUS, but this bill would begin intersecting these programs.
Much of the legislation in this area continues to be bipartisan. For 2024, only a few “must-pass” bills remain, such as annual appropriations bills (likely via at least one continuing resolution) and the National Defense Authorization Act, which can act as potential vehicles for inclusion of bills that would broaden CFIUS jurisdiction over real estate purchases. In the upcoming US Congress, foreign investors should expect new legislation on CFIUS and foreign investment—some of which might directly or indirectly address the issue of preemption.
In light of the Final Rule, FDI investors should consider the following:
Law Clerk Moshe Klein contributed to this LawFlash.
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