Foreign investment in the U.S. real estate and hospitality industry has exploded in recent years. To the surprise of many, the U.S. government is increasingly focused on the national security concerns raised by this trend. The federal watchdog overseeing these developments is the Committee on Foreign Investment in the United States, or CFIUS. CFIUS is a federal, interagency group headed by the U.S. Department of the Treasury and vested with broad authority to review national security risks posed by transactions resulting in foreign-person “control” over a U.S. business. Where CFIUS finds that foreign control over a U.S. business could threaten the national security, its power to condition the investment upon specific mitigation measures — or indeed to prohibit the investment altogether — is virtually unfettered.
Historically, the real estate and hospitality sectors have not been regarded as strategic targets for those seeking to harm the United States. In 2015, for example, CFIUS only received four notices concerning real estate transactions, suggesting that many such investments were closing without CFIUS review. But after a string of high-profile misadventures involving the blocking or ordered divestiture of Chinese investment in U.S. real estate and hotel properties, parties who give or take foreign investments in these sectors without considering the regulatory ramifications do so at some peril.
CFIUS in the Real Estate and Hospitality Sectors
Parties considering whether to file a notice should assess whether the transaction poses any threat to national security. This concerns the interplay between (1) the vulnerability exposed by potential foreign-person control of the U.S. business, and (2) the perceived threat posed by the foreign person proposing to make the investment.
CFIUS’s interest in national security vulnerabilities exposed in the real estate and hospitality sector gained prominence in 2012, when the Committee reviewed a Chinese-owned company’s purchase of wind farms located in Oregon. The wind farms produced a trivial amount of energy and involved no sensitive technologies. The transaction seemed to present no national security risks, and so the parties closed the transaction without notifying CFIUS. But the U.S. Navy later raised concerns that the location of the wind farms provided a vantage for espionage of nearby naval training facilities. CFIUS intervened, and President Obama ultimately ordered the Chinese-owned company to sell its interests in the wind farms.
So marked the public debut of CFIUS’s “proximity” or “co-location” concerns. Henceforth, a responsible CFIUS analysis would consider whether the specific location(s) of a U.S. business could expose a national security vulnerability, even when the business itself was not engaged in sensitive activities. This was again the obstacle to the Chinese Anbang Insurance Group’s planned acquisition of Hotel del Coronado, which CFIUS found untenable given the hotel’s proximity to a naval base in California.
A second set of national security concerns for the real estate and hospitality sectors derives from the identity of the subject property’s occupiers and nature of their activities. CFIUS explored these concerns in 2015, through its review and ultimate approval of the Chinese Anbang Insurance Group’s purchase of the Waldorf Astoria hotel in New York, which is the home of the U.S. Ambassador to the United Nations and host to U.S. and foreign dignitaries. Properties with sensitive U.S. government tenants, occupants or visitors present risk to the extent foreign-person control affords foreign access to sensitive information, including for espionage and information collection relating to activities at that location, or even sabotage of those activities.
But what about properties not occupied by entities or personnel of the U.S. government, nor situated near a military facility? Other national security risks in the hospitality sector include the surreptitious collection of information about government personnel and others visiting a hotel, including their whereabouts, with whom they meet, the content of their conversations, or even compromising information about their private activities. U.S. government concerns about the collection of personal, financial, health, and other data about U.S. persons have likewise drawn the real estate and hospitality sectors into CFIUS’s focus given information flowing to, from, and within these places.
Chinese Investment as a Special Threat
In determining the threat presented by a foreign investor, CFIUS considers the investor’s country of domicile and relationship with the United States; its affiliation with a foreign government; its investment objectives, whether commercial or strategic; its reputation for abiding by laws (including economic sanctions, export controls, and anti-corruption laws, among others); the nature of the foreign person’s other investments in the United States and abroad; and other factors bearing on national security.
CFIUS subjects investors from China to high scrutiny, particularly investors with connections to the PRC government. China’s expanding economy, growing military ambitions and capabilities, instances of intellectual property theft and cyber intrusions, and state-supported investment in spaces having strategic military implications (e.g., semiconductors, artificial intelligence) are driving concerns. The most recent CFIUS statistics, from 2015, indicate that 20 percent of all transactions noticed to CFIUS originated from mainland China. And it is telling that every transaction formally blocked by presidential order under the CFIUS authorities has involved Chinese investors or concern over Chinese influence. Pending legislation would counter these threats through an official CFIUS taxonomy that would designate China (and other U.S. adversaries) a “Country of Special Concern” warranting heightened scrutiny, while a contrary, “white list” category of friendly countries would be exempted from certain requirements. Depending upon the country, substantial foreign government involvement in the investment could make it subject to a mandatory CFIUS notice requirement.
When Does CFIUS Have Jurisdiction to Review a Transaction?
CFIUS has jurisdiction to review transactions that would result in foreign-person “control” over a U.S. business. “Control” means the power — through voting interests, board representation, special rights, or otherwise — to determine important matters affecting an entity. Against this broadly construed jurisdiction, it is a common misapprehension that CFIUS is only relevant to the acquisition of the U.S. business, or of at least 50% of it. These circumstances do confer jurisdiction, but CFIUS is authorized to review investments resulting in far lower levels of control — indeed, CFIUS has investigated transactions resulting in voting interests as low as 10%, and sometimes lower, particularly where national security concerns are significant.
Proposed legislation enjoying bipartisan support, if passed, would amend the CFIUS rules to expand its jurisdiction further, to include even a foreign person’s lease of, or concession offered in respect to, property in the United States — including even a vacant lot — where such property meets certain conditions (e.g., functions as a land, air or sea port; or is proximate to a sensitive U.S. government facility); or where the investment exposes certain information about U.S. persons. Certain types of properties (a “single ‘housing unit’”; real estate in “urbanized areas”) could be excepted, as could investments emanating from countries belonging to NATO or otherwise friendly to the United States.
CFIUS can also review certain joint ventures between U.S. and foreign persons where the U.S. party contributes a U.S. business over which the foreign party could exercise “control” — a common investment structure in the real estate sector.
Protecting the investment
Despite the growing national security interest surrounding real estate and hospitality transactions, and Chinese investors in particular, CFIUS has been a lesser consideration for investments in these sectors. This is changing, with CFIUS concerns increasingly necessitating a checklist of due diligence for transactions in these spaces. What should this sort of diligence involve? Here are some questions that parties to a covered transaction might consider when thinking about CFIUS concerns in the real estate and hospitality sectors:
- Where is the investor domiciled, and what is the relationship between that country and the United States?
- Who is the foreign investor, who owns the investor, and what is the investor’s past or present affiliation with any foreign governments?
- What is the investor’s track record of investing in the United States, and has the investor been through the CFIUS process before?
- What are the foreign investor’s explicit and implicit objectives in making the investment, and how do these align with the investor’s other businesses? How active or passive will the investor be in managing and accessing the property?
- What happens at the subject property — e.g., are there any U.S. government or defense-sector tenants or occupiers? What sort of business is transacted on the property? Who visits the property?
- What happens around the subject property — e.g., is the property proximate to sensitive U.S. government installations or critical infrastructure?
But if CFIUS Notification is a Voluntary Process, Why Submit?
Although proposed legislation would subject certain transactions to mandatory CFIUS notice requirements, under the current law, parties to a CFIUS “covered transaction” are not required to file a notice with CFIUS and violate no laws in deciding not to do so. But if they do not, CFIUS may investigate on its own initiative, even long after the deal has closed.
CFIUS can exercise extraordinary remedies in reviewing a transaction, including an order blocking the investment or even requiring that the foreign investor divest its interest. Even lesser mitigation measures can have real effects, including restrictions on foreign-person access to the property, to its IT infrastructure, or to information about the U.S. business. Mitigation could require appointment of a CFIUS-approved manager for the hotel property; or advance notice to CFIUS of renovations or improvements to the property, or the foreign person’s intention to make similar U.S. investments. CFIUS mitigation agreements have included the requirement that an independent, CFIUS-approved board member or security officer be appointed; that reports be filed with CFIUS; and that third-party audits corroborate compliance with the mitigation agreement’s terms.
Given the prospect of CFIUS-related encumbrances placed on the foreign person’s investment after the deal has closed, it is unsurprising that parties are filing CFIUS notices with greater frequency, hoping to bulletproof the investment against future interference. But even where they acknowledge the prudence of notifying CFIUS about their transaction, parties often fret over the timing and uncertainty associated with the review process. Although nominally subject to a 30-day review with the possibility of a second, up-to-45-day extension, the CFIUS process has lengthened in recent years (due to the higher number of filed notices and constrained resources at CFIUS), often running 4-5 months from start to finish for complex transactions. Legislation that would amend the CFIUS process could further lengthen review, although that is not the stated goal.
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With CFIUS’s attention drawn increasingly to investments in the real estate and hospitality sectors, and particularly those from China, industry participants are wise to amend their checklists to include CFIUS considerations in the planning and diligence process as well as in deal negotiation and allocation of risk among the transaction parties.
 CFIUS is a multi-agency committee comprised of voting members from the Departments of the Treasury (chair), Justice, Homeland Security, Commerce, Defense, State, Energy, the Office of the U.S. Trade Representative, and the Office of Science & Technology Policy.
 Committee on Foreign Investment in the United States, 2015 Annual Report to Congress at 7. Current figures are not available because CFIUS releases delayed annual reports. The 2015 Annual Report is the most recent.
 Order of September 28, 2012 Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, https://obamawhitehouse.archives.gov/the-press-office/2012/09/28/order-signed-president-regarding-acquisition-four-us-wind-farm-project-c.
 Ellen Sheng, As Chinese Investment In U.S. Increases, So Too Does Scrutiny, Forbes (Nov. 2, 2016, 6:30 AM), https://www.forbes.com/sites/ellensheng/2016/11/02/chinese-investment-us-scrutiny/#243b33c4982d.
 2015 Annual Report to Congress at 23-24.
 2015 Annual Report to Congress at 16-17.