On August 13, 2018, the President signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019, which includes the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). This new law amends and expands the scope and responsibilities of the Committee on Foreign Investment in the United States (CFIUS) to include certain real estate and other transactions.

By way of background, CFIUS is a government body originally authorized to review any merger, acquisition or take-over that could result in control of a U.S. business by a foreign individual or entity. The review is intended to determine the effect of a proposed transaction on the national security of the United States. CFIUS members include the Departments of the Treasury, State, Defense, Justice, Commerce, Energy, and Homeland Security; the Office of the United States Trade Representative and the White House Office of Science and Technology Policy. There are other ex-officio and non-voting members on the Committee.

Generally, parties submit notices of transactions to CFIUS for review and determination. To date, submitting proposed transactions to CFIUS has been a voluntary process. CFIUS also has the authority to review pending or completed transactions absent a voluntary notice if it determines that the transaction could raise national security concerns. If the CFIUS review concludes that a transaction poses national security concerns, the committee may seek to have the parties agree on mitigation procedures to resolve the concerns. Ultimately, if concerns cannot be resolved, CFIUS can refer the transaction to the President, who in turn can suspend or prohibit the transaction, including by requiring divestment.

Among other things, FIRRMA expands the scope of transactions that may be subject to CFIUS review to include certain investments in U.S. real estate. Specifically, the amendments expand the scope of “covered transactions” to include: “the purchase or lease by, or concession to, a foreign person of private or public real estate in the United States” that:

• Is located within, or will function as a part of an air or maritime port;
• Is in close proximity to a United States military installation or another facility or property of the United States government that is sensitive for reasons relating to national security;
• Could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at one of those installations, facilities, or properties; or
• Could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.

The statute contains exceptions for certain real estate transactions, including (a) a single “housing unit” and (b) real estate in “urbanized areas” (although this exception could be limited by CFIUS regulations based on input from the Department of Defense). Additionally, subject to regulation, the term “close proximity” is limited to a distance or distances within which the purchase, lease, or concession of real estate could pose a national security risk in connection with a U.S. military installation or another facility or property of the U.S. government.

In addition to the specific expansion to real estate, CFIUS review will include “other investments” by a foreign person in any U.S. business that covers certain aspects of critical infrastructure, critical technologies, or personal data of citizens that could be exploited in a way that threatens national security. The determination of whether a particular investment (including investments by foreign persons in a fund) falls within the scope of the statute will also depend on the nature of the foreign investor’s access to information, voting rights, and decision-making rights.

The new law also expands the CFIUS mandate to include certain joint venture agreements for the first time. It also makes CFIUS review mandatory in certain circumstances, including transactions in which a foreign investor comprised of at least 25 percent government ownership acquires 25 percent or more of the voting interests of a U.S. business.

Additionally, the statute directs CFIUS to adopt regulations with respect to acquisitions and other transactions arising through a bankruptcy proceeding or a default on debt. Presumably, transactions through which a foreign person could acquire an interest in a covered transaction through bankruptcy or enforcement of a security interest could also be within the scope of required review.

FIRRMA also mandated the development of certain regulations and will outline the procedures by which reviews may be requested or initiated, the time limits involved, the scope and enforcement of mitigation agreements, and the penalties for violations.

The expansion of the CFIUS scope to include real estate and certain other investments is not immediately effective. The scope changes will take effect on the earlier of 18 months after the date of enactment or 30 days after the chairperson of the Committee determines that the regulations, organizational structure, personnel, and other resources necessary to administer the expanded scope are in place.

Although the exceptions described above suggest that the application to real estate transactions will be relatively limited, certain key issues will be prescribed by regulations. For example, as stated, even though urbanized areas are excluded, the statute does allow for possible regulatory expansion. Accordingly, it will be important for the real estate industry to consider reviewing and commenting on proposed regulations. In addition, depending on the ultimate scope of the regulations, parties to transactions may want to consider including appropriate representations and warranties and pre-closing conditions in documents, as well as conducting additional due diligence.