Wouldn’t you want to know if a foreign body purchased land with a direct view of some of our country’s most important airfields, naval bases, or government buildings? We thought so. The federal government does too.
That’s why earlier in 2020, the Foreign Investment Risk Review Modernization Act (FIRRMA) was expanded to include the national security review of investments and real estate transactions that previously fell outside the jurisdiction of the Committee on Foreign Investment in the U.S. (CFIUS). This enhanced oversight (part 802) now authorizes CFIUS to review the foreign purchase and lease of real estate located within proximity to U.S. airports, seaports, and military installations.
FIRRMA’s Real Estate Focus: Sending a Signal
Prior to FIRRMA reform, CFIUS review was generally voluntary. The investigation process usually involved large M&A transactions that would result in foreign control of a U.S. business deemed important to national security. Among other changes, FIRRMA broadened the scope of covered investments, created mandatory filing requirements for investments in critical technology, infrastructure, and data (TID) assets, provided a more permanent Committee funding structure, and expressed a clear Congressional intent for the Committee to wield its non-notified powers—that is, investigating and possibly forcing review of transactions not filed with the Committee.
While real estate transactions covered by part 802 of the legislation are not mandatory, a few factors point to a focus on real estate:
- The Committee has a strong history rooted in unwinding large real estate deals like the Dubai Ports deal or the Ralls windfarm divestiture
- Real estate investors have their own regulation (part 802) which covers investments, leases, concessions, and other nuanced aspects of real estate deals
- The Committee put effort into publishing a tool specific to real estate
What does all this mean? At a minimum, it seems like CFIUS cares about real estate transactions. As the largest deliberative regulatory body in the U.S. government—representing a broad collection of Executive Branch organizations and sub-organizations—this new focus sends a signal to the rest of the national security community that we should care, too.
After all, CFIUS’ actions are driven by “national security”—the definition of which requires discretion. Ultimately, the Committee looks at each transaction to determine the threat, vulnerability, and consequence, or collectively, the risk posed to the safety and security of our nation. To understand whether a particular property, project, lease, investment, or business partner triggers review requires regular investigation.
Benefits of a Preemptive National Security Review Strategy
So, how do you proactively perform regulatory due diligence for CFIUS, or other national security driven regulatory programs? A good start would be to determine the “national security value” of the asset—or, ask yourself what might CFIUS, as the proxy national security evaluator for the United States, care about? Second, assess whether you, your lessee, or co-investors, are connected to any foreign parties that may trigger regulatory review or action.
Once under CFIUS review, or during post-transaction monitoring, a number of tactical and compliance-driven measures are prudent. However, a preemptive investigation of national security risk can add immense value by driving earlier decisions that mitigate transaction costs and the risk of losing the entire deal.
One of the most important benefits of regulatory due diligence is that it can provide investors and property owners a competitive investment advantage by better understanding underlying regulatory value or risk with a particular asset, asset class, or investment partner.
Finally, particularly for higher-volume investors, regulatory due diligence integrated into your corporate or investment strategy facilitates a transparent, communicative, and cooperative relationship with regulators concerned about national security.
So whether you’re just trying to stay compliant with FIRRMA by getting ahead of CFIUS review, or understand that due diligence can add enormous value to your business and regulatory relationships, we should all be seeing this new focus on real estate as a major national security win.
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