The Committee on Foreign Investment in the United States (CFIUS) is an interagency body tasked with reviewing foreign investments into the U.S., which could threaten the country’s national security interests. Established under Section 721 of the Defense Production Act and its implementing regulations, CFIUS’s role is to review proposed transactions and, when warranted, make recommendations to the president to block or unwind transactions that are deemed to present irresolvable national security concerns.
Historically, CFIUS’s scrutiny focused on military contractors, producers of defense articles, aerospace manufacturers, and similar types of companies engaged in the industries most commonly associated with “national security.” In more recent years, as technology has evolved, CFIUS expanded its interests to encompass the information technology space, with specific attention being paid to manufacturers and providers of semi-conductors and other electronics components that could be used by agents of an unfriendly state to surveil U.S. citizens or sabotage government activities.
Regardless of the industry, until 2018, CFIUS jurisdiction was limited to corporate-level transactions involving the acquisition of existing U.S. businesses by foreign parties. But under the 2018 amendments to the Defense Production Act, as implemented by regulations that took effect in February 2020, CFIUS now has the authority to review transactions involving the purchase of U.S. real estate by foreign parties. The 2018 amendments broadly expanded CFIUS’s jurisdiction in a number of other areas as well, including “critical technology” and “critical infrastructure.” This article is intended to give readers a high-level understanding of how the real estate provisions of the amendments can affect renewable energy siting.
CFIUS’s historic concerns with location
Although the question of geography was never explicitly addressed in the CFIUS regulations prior to 2018, it was well known that CFIUS had siting concerns when foreign parties acquired U.S. businesses that were located within some unspecified proximity to sensitive government facilities. In fact, the only published case concerning CFIUS’s jurisdiction involved the location of a wind farm that had been purchased by investors who had ties to the Chinese government. The decision in that case, Ralls Corp. v. CFIUS, held that the investors’ acquisition of a U.S. renewable energy company whose assets included a project site within restricted naval air space presented insurmountable security issues, and the court upheld the president’s plenary authority to force a divestment and order the removal of construction. The upshot is that CFIUS’s authority to investigate a transaction – and the president’s authority to block or unwind a transaction – are essentially non-reviewable, and parties to real estate transactions with foreign investors should make use of the information the government has made available to determine if their transaction might present concerns.
Defining “covered real estate transactions”
The CFIUS regulations governing the foreign acquisition of real estate (the “Real Estate Regulations” at 31 C.F.R. Part 802) contain detailed definitions and procedures, which will not be addressed here. Instead, this section offers an overview of the key terms and considerations parties should think about before entering into real estate transactions in certain areas of the U.S.
A “covered real estate transaction” is a transaction involving the purchase or lease by, or concession to, a “foreign person” of “covered real estate,” in which the “foreign person” obtains at least three of four listed property rights, and which is not otherwise an “excepted real estate transaction” as defined in the Real Estate Regulations. The listed property rights are (i) physical access, (ii) the right to exclude, (iii) the right to improve or develop the real estate, or (iv) the right to attach fixed or immovable structures or objects to the real estate. Most real estate transactions involving renewable energy project sites would likely include at least three, if not all four, of the listed property rights.
The term “foreign person” is broadly defined to include any foreign national, foreign government, foreign entity, or any entity over which control can be exerted by a foreign national, foreign government, or foreign entity. In other words, a U.S. company that is subject to control by a foreign party is considered a “foreign person” for CFIUS’s purposes. This was the problem for the investors in Ralls, which was a U.S. corporation that was ultimately subject to control by Chinese citizens.
The term “covered real estate” is geographically defined as any property that (i) is, is within, or is part of, a “covered port”, or (ii) is located: (a) within “close proximity” (1 mile) of certain listed military installations, (b) within the “extended range” (100 miles) of certain other listed military installations, (c) within certain counties or portions of counties where the U.S. houses ballistic missile facilities, or (d) within the territorial sea around certain listed military installations. To allow parties to identify the military installations in a given area, CFIUS has developed a user-friendly mapping tool, which enables parties to input street addresses, intersections, or geographic coordinates to get a rough estimate of the military installations in the vicinity.
Once parties have determined that the object of their transaction is “covered real estate,” they should think hard about whether they qualify for one of the exceptions under the Real Estate Regulations. A number of exceptions are listed in the Real Estate Regulations, but, in most cases, for a large-scale renewable energy project to qualify as an “excepted real estate transaction,” either the real estate must be located in Indian country or Alaska native lands, or the acquirer must be an “excepted real estate investor” – a status that can be difficult to establish.
In principle, an “excepted real estate investor” is any party of Australian, Canadian, or UK origin (the “excepted real estate foreign states”), who does not also have citizenship in any other countries, but in practice, establishing “excepted real estate investor” status for entities can be a lengthy and convoluted process. As mentioned in the case of Ralls, a U.S. entity that has foreign ownership is considered a “foreign person” under CFIUS, so to establish “excepted real estate investor” status, both the acquiring entity and all of its “parent” owners must satisfy a number of criteria, with the end result being that the acquiring entity is ultimately owned and controlled by citizens of the U.S. or any of the three “excepted real estate foreign states.” In the case of publicly held companies, the analysis can be particularly challenging. Even if the citizenship test is passed, there are a number of caveats and disqualifying factors that impact whether an investor is an “excepted real estate investor,” so out of an abundance of caution, many investors in real estate transactions that involve “covered real estate” are opting to file with CFIUS, even when they think they might qualify as “excepted real estate investors.”
Options for parties to “covered real estate transactions”
As is the case with the longstanding rules on CFIUS “covered transactions,” in which a foreign person acquires corporate-level control over a U.S. business, parties to “covered real estate transactions” may elect to file a full notice with CFIUS, an abbreviated short-form declaration, or no filing at all, depending on the risk tolerance of the parties. There are no mandatory filings for “covered real estate transactions.” However, as the investors in Ralls found out, the consequences of not filing can be severe.