U.S. Toughens Criteria for Some Foreign Investment in Real Estate

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Trump Signs National Security Legislation

A deal by China’s Anbang Insurance Group to purchase the landmark Hotel del Coronado in San Diego near a major naval base was called off in 2016 following opposition from the U.S. Committee on Foreign Investment in the United States.

International real estate investors could have another hoop to jump through with President Donald Trump signing into law the National Defense Authorization Act.

The new law contains the Foreign Investment Risk Review Modernization Act of 2018, which strengthens and modernizes the Committee on Foreign Investment in the United States. The reforms in that section are what potentially open more real estate deals to federal review.

While the Committee on Foreign Investment, known as CFIUS, reforms do have potential impact on real estate, they are mainly designed to add protection to critical U.S. technologies and infrastructure, and are designed to protect them from China-based investors.

The act “does not directly mention China or Chinese investments, but as its Congressional sponsors made clear when it was introduced, the legislation is mainly designed to restrict Chinese investments that are believed to threaten or undermine U.S. national security,” according to an analysis by Nick Bolin, a partner in the Washington, D.C., law firm of DrinkerBiddle.

Accordingly, China-based companies, investors, and Chinese owned or controlled investment funds can expect to receive heightened scrutiny in any new or increased investments in the United States or U.S. companies, Bolin noted.

The legislation also directs the U.S. Department of Commerce to undertake a comprehensive investigation of Chinese investment in the U.S., including the pattern of existing investments in U.S. strategic industries, Bolin noted.

Despite increasing trade tensions between the two countries, China’s Ministry of Commerce reacted rather mildly to the enactment of the law.

“The current economic globalization is developing in depth, and cross-border investment is on the rise. Chinese and American companies have a strong will and great potential in deepening investment cooperation,” according to a translation of the Ministry’s statement. “The U.S. should treat Chinese investors objectively and fairly, and avoiding national security censorship as an obstacle to investment cooperation between Chinese and American companies.”

Clearly toughened CFIUS reforms are already having an impact on Chinese investment.

Last week, China’s Shenzhen Energy called off plans for a $232 million purchase of U.S. energy projects run by Recurrent Energy Development. The period for CFIUS review of the acquisition expired and with it Shenzhen’s hope of winning approval, the company said in a prepared statement.

It was also widely reported last week that the U.S. government told Chinese conglomerate HNA Group it has to sell its majority stake in 850 Third Ave. in New York. In 2016, a venture of HNA Property Holding Group of China and MHP Real Estate Services acquired the 21-story, 613,664-square-foot office building for $463 million.

In the reports, HNA indicated that is in the process of selling its majority share even though no forced sale or seizure is underway or pending.

850 Third Ave. houses the New York Police Department’s 17th Precinct, which is in charge of protecting Trump’s family when they’re in the city and hence the reason for the government’s action.

Under CFIUS’ current authority, it could prevent the sale of a property to foreign companies if the property is located near a “sensitive” site that could jeopardize national security. Sensitive site in this context refers to air or maritime ports, U.S. military installations or other U.S. government facilities or properties that are national security sensitive.

In the reforms signed into law yesterday, that scope of review is expanded to include stripping a company of its current ownership in a property and will now allow for the review of leases that could be signed near sensitive sites.

The act “defines the types of real estate transactions that will trigger CFIUS review, a move that could also be seen as defining those transactions that won’t,” according to a legal alert from the law firm of Paul Hastings. “In a true expansion, the bill extends CFIUS review to covered real estate leases and concessions, not just purchases.”

However, the new law also limits CFIUS’ jurisdiction over real estate transactions in key ways, the Paul Hastings firm noted.

The new bill says CFIUS “may not expand the categories of real estate” subject to review beyond those identified in the statute.

CFIUS can only define “close proximity” as referring to distances. The text implies that the committee can review a transaction that might involve property permitting observation of operations at military installations, but not necessarily one involving acquisition of a commercial building near a U.S. government facility.

And the power to review real estate transactions applies only to those involving certain “categories of foreign persons,” still to be defined by CFIUS.

The act’s reforms still require new regulations to be formulated by the Treasury Department including specifically defining who and/or what makes up foreign investment. The reforms do not kick in for another 18 months.

The review of real estate transactions does not include deals involving single-family purchases.

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