Nothing to See Here

Although much of the popular press has focused recently on the tariffs imposed by the United States on Canadian steel and aluminum imports for “national security” reasons, there are also growing national security concerns in the United States about foreign ownership of American real estate, and this new American investment xenophobia may have spillover benefits on Canadian real estate investment.

The Committee of Foreign Investment in the United States (“CFIUS”) is an inter-agency, cabinet-level committee within the U.S. government chaired by the Department of the Treasury and tasked with examining the national security implications of foreign direct investments in the United States. President Trump (almost surreptitiously in contrast to the high-profile steel and aluminum tariffs), recently passed the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) materially expanding CFIUS’ scope of authority and implementing administrative changes that give greater powers to CFIUS in exercising such newfound authority.

FIRRMA’s most substantial reform is the extension and codification of CFIUS’ jurisdiction to investments in real estate “near” U.S. government “strategic locations.” Prior to the enactment of FIRRMA, foreign investments in real estate near U.S. government strategic locations were within CFIUS’ jurisdiction only if such investments coincidentally arose in the context of a larger transaction resulting in a foreigner’s control over a U.S. business. FIRRMA codifies CFIUS’ jurisdiction to review a pure asset deal – any direct purchase, lease, or concession by or to a foreigner of any real estate asset near a U.S. government strategic location.

Ironically (well, not so ironic if you are a conspiracy theorist), the definition for requisite proximity is actually circular: a piece of real estate is “near” a strategic location if it is within whatever radius could pose a national security risk. Furthermore, what constitutes a strategic location is equally vague: while airports, military bases and similar government installations are reasonably self-evident, the list of potential strategic locations is neither finite nor terribly precise.

FIRMMA also gave CFIUS a new “general anti-avoidance” power to make any transaction reviewable if such transaction was somehow intended to or has the effect of circumventing or evading review by CFIUS. While the details of this general anti-avoidance power are expected to be set forth in enabling regulations due out soon, as FIRMMA is currently drafted, no transaction, no matter how seemingly removed it is from being a bona fide national security concern, can safely be presumed to be exempt from CFIUS oversight.

There is a bit of a silver lining to FIRRMA though. Parties now have the option to submit a “short-form declaration” outlining basic information regarding the transaction (essentially, a “light-filing” or “summary judgement” type of application) for those transactions that they believe are unlikely to jeopardize national security. CFIUS will then have 30 days from the date the short-form declaration is filed to respond by clearing the transaction altogether or initiating a full CFIUS investigation in lieu of clearance.

It is widely speculated that FIRRMA was passed to target high-risk investments by Chinese and Russian government interests. Of course, seasoned Chinese investors in U.S. real estate already know all too well the reach of CFIUS, even before its powers were significantly boosted by FIRMMA. In 2016, Beijing-based Anbang Insurance Group acquired a group of luxury hotels from New York City-based Blackstone Group, including the famed Waldorf Astoria Hotel. While CFIUS ultimately approved the take-over of the business (including ownership of the Waldorf Astoria), another hotel in the same business—the Hotel del Coronado near Naval Amphibious Base Coronado, a U.S. Navy SEAL training base in San Diego—was dropped from the package after CFIUS expressed national security concerns (and this was before Trump won the election and ushered in even more anti-Chinese rhetoric!). Anbang Insurance Group is again back in CFIUS’ sights—this time with greatly expanded CFIUS powers thanks to FIRMMA—in light of Anbang’s recent takeover by the Chinese government.

Ultimately, it is too early to tell what risk this new review process and new powers will pose to foreign acquisitions of typical U.S. real property assets. At best, FIRRMA will prove to be a due diligence “red tape” irritant to most foreign investors in U.S. real estate. At worst, FIRRMA could strangle foreign investment in U.S. real estate from friends and foes alike. Regardless of how FIRRMA ultimately impacts U.S. real property investment, FIRRMA has already made an instant winner out of Canadian real estate. Foreign investors and domestic Canadian investors even thinking of investing in the United States now have at least one more reason to look north of the 49th Parallel instead for real estate investment opportunities, and, anecdotally, Canadian markets are already seeing the benefit of growing U.S. “national security” concerns.

Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
Jeffrey W. Lem is Editor-in-Chief of the Real Property Reports and the Director of Titles for the Province of Ontario. The opinions expressed in this article are personal to the author and not attributable or referable to the government of the Province of Ontario.
Jeffrey W. Lem is Editor-in-Chief of the Real Property Reports and the Director of Titles for the Province of Ontario. The opinions expressed in this article are personal to the author and not attributable or referable to the government of the Province of Ontario.
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