GSA Mandates Disclosure of Foreign Ownership/Financing of High-Security Leased Spaces

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Highlights

  • The new General Services Administration (GSA) Rule imposes disclosure requirements regarding the foreign ownership of prospective lessors of "high-security leased space" (property leased to the federal government having a security level of III or higher) and mandates access limitations on such foreign-owned lessors.
  • As of June 2021, GSA estimates about 16 percent of the existing leases in its portfolio (or 1,263 out of 7,860 leases) constitute "high-security leased spaces."
  • Although the Rule is effective immediately, GSA is seeking public comments and will consider such comments when forming the final rule. The deadline for submitting a comment is Aug. 30, 2021.

The General Services Administration (GSA) amended the General Services Administration Acquisition Regulations (GSAR) via an interim rule (Rule) – effective June 30, 2021 – to incorporate disclosure obligations of foreign ownership of high-security spaces leased to the federal government. Specifically, the Rule adds two new requirements to the GSAR: 1) lessors must make a representation regarding foreign ownership or foreign financing of "high-security leased spaces" – spaces with Facility Security Levels III, IV or V – and 2) foreign-owned or foreign-financed leases must limit access to foreign lessors. 

Background

The Rule stems from the Secure Federal Leases from Espionage and Suspicious Entanglement Act (Act), which became law on Dec. 31, 2020, and imposed requirements on federal agencies to obtain ownership information of foreign-owned buildings for high-security leases.

The Act was passed in response to a 2017 Government Accountability Office (GAO) report, which revealed certain federal agencies were not aware that their high-security spaces were located in foreign-owned buildings. It also revealed that GAO was unable to identify the ownership information of approximately one-third of the government's high-security leases. GAO concluded that the use of such spaces for classified operations and storage of sensitive data created security risks and national security concerns of espionage and unauthorized cyber and physical access.

Applicability of the Rule

The Rule is applicable to new leases by GSA and the head of any federal agency that has independent statutory leasing authority; but will not apply to leases with the U.S. Department of Defense and the Intelligence Community agencies, as such agencies are already subject to similar ownership disclosure requirements pursuant to the 2018 National Defense Authorization Act. New leases include not only lease awards but also options for current leases (e.g., renewal, succeeding and replacing leases and other novations), lease extensions and ownership changes for high-security leased spaces entered into on or after June 30, 2021. Thus, while the Rule is effective immediately, there are no retroactive disclosure obligations.

Information Required to be Disclosed

The Rule mandates that lessors disclose, through a newly imposed representation at 48 C.F.R. § 552.270-33, whether the immediate owner or the highest-level owner of the building, as well as any entity involved in the financing, is a foreign person or entity and the associated country of citizenship or organization. "Immediate owner" is defined as "an entity that has direct control of the . . . lessor," and "highest-level owner" is defined as "the entity that owns or controls [the] immediate owner . . ." The following factors may indicate control: "ownership or interlocking management, identity of interests among family members, shared facilities and equipment, and the common use of employees."

The representation also requires the lessor to state whether the lease is financed by a foreign entity, and if so, lessors must disclose the legal name, unique entity identifier, physical address and country of foreign financing. "Financing" captures debt and equity fundraising for the lease, including acquisition, maintenance and construction of and improvements to the property.

In addition to foreign ownership disclosure requirements, applicable leases will be required to include a new GSAR clause at 48 C.F.R. § 552.270-34, which provides access restrictions for the foreign owner and property manager. Specifically, lessors and property managers will be required to obtain approval from the government before accessing the leased space.

Impact of the Rule and Other Considerations

In the event of foreign ownership or foreign financing, prior to awarding the lease, GSA or the contracting officer will coordinate and consult with the federal tenant on any security concerns and necessary mitigation measures. Once a lease is executed, the lessor will be required to verify its ownership and financing information on an annual basis.

While the Rule does not disqualify foreign-owned or foreign-financed buildings from leasing to federal agencies, it will result in enhanced scrutiny by GSA of new leases or lease novations. Importantly, these new requirements are separate from the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) in connection with reviews of covered real estate transactions (see a 2019 Holland & Knight-authored article related to CFIUS's jurisdiction of "covered real estate transactions"). Given the interagency dialogue among federal government agencies, the Rule also may increase CFIUS's reviews of covered real estate transactions.

Although the Rule is effective immediately, GSA is seeking public comments and will consider such comments when forming the final rule. The deadline for submitting a comment is Aug. 30, 2021.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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