REITs and the Foreign Investment Risk Review Modernization Act
On May 22, 2018 the Senate Banking and House Financial Services Committees each unanimously approved versions of the Foreign Investment Risk Review Modernization Act (FIRRMA; S. 2098 and HR 5841). These two similar bills are intended to strengthen the review of inbound foreign investment by the Committee for Foreign Investment in the United States (CFIUS), the interagency executive branch body with authority to review foreign transactions for potential national security concerns. Importantly for REITs, both bills would expand the list of covered transactions to explicitly include some foreign purchases and leases of real estate near military and other strategic facilities.
As currently drafted, the bills would expand CFIUS “covered” transactions to include the “purchase or lease by a foreign person”, or a “concession” offered to a foreign person, of “private or public real estate” located near an air or sea port, or in proximity to a military installation or other sensitive property. The Senate bill also contains language explicitly including real estate transactions that could “reasonably provide the foreign person the ability to collect information, otherwise expose national security activities,” or expose national security activities to “the risk of foreign surveillance.”
Both bills would, however, exclude properties in an “urbanized area,” as defined by the Bureau of Census, from the covered real estate definition “except as otherwise prescribed by the Committee on Foreign Investment in the U.S.” At present the U.S. Bureau of Census defines an “urbanized area” as one comprising more than 50,000 people.
Nareit is presently working with key members of Congress and staff in both chambers and in the Trump Administration to clarify that the purchase of shares in a U.S. listed REIT would not be considered a covered “purchase” of real estate under FIRRMA. Senior House and Senate staff have told us that the intent of this language is only to cover direct purchases of real property, not securities in REITs owning and operating properties.
Although these bills would explicitly add some real estate transactions to the statutory framework, CFIUS has long regarded real estate transactions involving properties located near critical infrastructure and sensitive facilities to be within its purview. In 2009 CFIUS effectively blocked an acquisition by a Chinese firm of a mining company near a military base. In 2012 a Chinese purchaser was required to divest a windfarm near a naval base. Most recently, CFIUS scrutinized, but ultimately permitted, the purchase the Waldorf Astoria hotel in New York by a Chinese firm.
Last year, three Democratic Senators formally requested that the U.S. Government Accountability Office (“GAO”) report to Congress on how CFIUS assesses national security risks with respect to foreign real estate investment. The Senators asked for specific information on whether CFIUS had effective means to evaluate whether foreign real estate transactions could afford a foreign investor with “physical or cyber access to U.S. government personnel and systems”. The GAO has not yet submitted its report.
Before reaching the House and Senate floor, the FIRRMA bills must be approved by the House and Senate Armed Services Committees for inclusion in the must-pass National Defense Authorization Act. Congressional staff has told us that they expect FIRRMA to be ready for floor consideration in each chamber in July.
In January the Trump Administration signaled support for FIRRMA and congressional efforts to enhance the CFIUS regime. However, in their committee markups, both the House Financial Services and Senate Banking Committees added language that would prevent the president from modifying any penalties on "Chinese telecommunication companies" unless the administration certifies that the company has not violated any U.S. laws for one year. These amendments, which reflected bipartisan disapproval of the Administration’s recent reversal of sanctions on the Chinese technology firm ZTE, could complicate final enactment.