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As 2024 gets into full steam, we&nbsp;will take a&nbsp;look back on a key emerging area of real estate law in 2023: the expanding restrictions on transactions by foreign persons, including foreign direct investments, in U.S. real estate.

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The U.S. government and, increasingly, state governments, have promulgated such restrictions based on concerns relating to national security, including with respect to the proximity of real estate to military bases, access to airports and seaports, and food security concerns relating to agricultural land.

If you are a foreign investor who is considering making real estate investments in the U.S., this article explains how best to navigate these emerging restrictions.

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The Committee on Foreign Investment in the United States is an interagency body, chaired by the U.S. Department of the Treasury, which oversees certain FDI and real estate transactions.

CFIUS administers two sets of regulations, its FDI regulations at Title 31 of the Code of Federal Regulations, Part 800, and its real estate regulations at Title 31 of the Code of Federal Regulations, Part 802, under the authority of Section 721 of the Defense Production Act, as amended by the Foreign Investment Risk Review Modernization Act.

The CFIUS' FDI regulations empower the committee to review: (1) any transaction in which a foreign person obtains control over a U.S. business engaged in interstate commerce, and (2) certain noncontrolling transactions in a U.S. business with a nexus to critical technologies, critical infrastructure or sensitive personal data, in which a foreign person obtains board or observer rights, access to certain technical information, or involvement in certain substantive decision making.

Notably, certain investments in critical technology companies or those involving sovereign investors are subject to a CFIUS filing requirement, whereas filings for other covered investments are made on a voluntary basis.

For purposes of this discussion, the FDI regulations are relevant to the extent that a real estate transaction involves an investment in, or acquisition of, a U.S. business.

Under the CFIUS real estate regulations, the committee has jurisdiction to review transactions in certain covered U.S. real estate in which a foreign person will obtain at least three of the following four rights:

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To exclude others from physically accessing the real estate;

To improve or develop the real estate; or

To attach fixed or immovable structures or objects to the real estate.

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Specifically, CFIUS has authority to review transactions in which foreign persons gain the above rights in real estate that falls within:

One mile of certain military installations;

99 miles of certain military installations;

Certain counties identified in connection with military installations; or

Notably, both for FDI and real estate transactions, CFIUS has discretion to review any nonnotified covered transaction, even years later.

When reviewing a transaction, CFIUS will assess various aspects of the national security implications of the transaction and is empowered to mitigate any identified risk, including limiting the foreign person's information or governance rights, or even blocking or unwinding the transaction.

The CFIUS review period takes months and is an important timing consideration for a transaction involving a foreign investor or foreign person obtaining real estate rights in the U.S.

There were several recent noteworthy developments in the law concerning bans or limitations on land acquisition and ownership by foreign actors or entities owned by foreign actors in 2023.

More than half of the states in the U.S. — 26 out of 50 — have already adopted land acquisition restrictions, 15 of which enacted additional restrictions within the last calendar year alone.

It should be noted that state laws vary markedly, ranging from outright prevention of foreign ownership of certain land to more limited reporting obligations following acquisition.

As of today, the following states have passed laws regarding foreign investment in real estate: Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.

Of these, a handful of states — Alabama, Arkansas, Florida, Illinois, Iowa, Kansas, Maine, Missouri, Ohio and Texas —&nbsp;mandate disclosure of acquisitions of certain real estate by foreign investors, along the lines of the U.S. Federal Agricultural Foreign Investment Disclosure Act, or AFIDA.

Furthermore, Texas has enacted a law prohibiting transactions providing access to critical infrastructure properties by entities owned or controlled by individuals who are citizens of, or headquartered in, China, Iran, North Korea or Russia.

Other states regulate foreign investment in other notable ways, such as restrictions on total acreage and outright bans on certain investments.

Therefore, even in instances where CFIUS does not exert its jurisdiction to analyze a foreign land acquisition, the states — in whose confines the subject property is located — have the power to review a transaction for national security concerns.

The U.S. Supreme Court has consistently affirmed that states have general broad power to regulate real property within their jurisdiction without paying compensation for economic injuries that such regulation entails.[1]

This review extends to property acquisitions by friendly countries that utilize foreign vendors, suppliers or design professionals that may raise security concerns.

In fact, in February 2023, government officials in Grand Forks, North Dakota, unanimously voted 5-0 to strike down the proposed development of a corn mill by the Chinese-owned Fufeng Group. This followed an announcement by the U.S. Air Force that the project was within only 12 miles of the Grand Forks Air Force Base, which reportedly is developing highly sensitive drone technology.

Local&nbsp;North Dakota officials and federal authorities warned that the Fufeng Group — an internationalized biofermentation products manufacturer — has deep ties to China's ruling Communist Party, and that the proposed corn mill presented a major risk given the proximity to the Air Force base and its connection with military activities related to both air and space operations.

As a result, the Fufeng Group, which paid $2.3 million to purchase the land and had planned to invest $700 million to develop the facility, is now barred from moving forward with the development.

Shortly thereafter, in mid-2023, Alabama passed the Alabama Property Protection Act, banning a foreign principal from acquiring title to, or a controlling interest in, certain agricultural or forest land or property within 10 miles of a military installation or critical infrastructure.

The Alabama law defines "foreign principal" as the government or official thereof, or any political party or member thereof, of China, Iran, North Korea or Russia. The term also includes a "country or government identified on any sanctions list of the U.S. Department of the Treasury's Office of Foreign Assets Control," which could sweep in over 20 other countries.

More recently, on Jan. 2, 2024, Missouri Gov. Mike Parson issued Executive Order No. 24-01, banning individuals and businesses from nations designated as "foreign adversaries" from purchasing agricultural land within a 10-mile radius of critical military facilities in the state of Missouri.[2]&nbsp;

In issuing the order, Parson noted the "heightened concerns regarding ownership of Missouri farmland by foreign adversaries, especially China … to safeguard [US] military and intelligence assets, prevent security threats to our state, and give Missourians greater peace of mind."

However, Parson also made clear that the order should not diminish Missouri's important economic partnerships with foreign allies such as Israel, Sweden, Germany, the U.K. and Japan, among others, that have a long-standing presence in Missouri and employ thousands of Missourians.

In particular, the executive order bans any citizen, resident or business from a foreign adversary identified in Title 15 of the Code of Federal Regulations, Section 7.4, from owning or acquiring Missouri agricultural land within 10 miles of critical military facilities.

Presently, countries classified as foreign adversaries under this authority include China, Cuba, Iran, North Korea, Russia and Venezuela.&nbsp;Under the order, "critical military facilities" refers to all staffed military facilities located within the state of Missouri, but it does not affect existing landowners in any manner.

Foreign agricultural land purchases in Missouri are currently capped at 1% of the total agricultural land across the state pursuant to Section 442.571; however, the executive order now creates more stringent requirements for these land purchases, and requires approval from the Missouri Department of Agriculture prior to any foreign acquisitions of agricultural land, as well as disclosure to the department prior to any foreign entity acquiring Missouri agricultural land.

As always under the law, it is fundamental to balance restrictive security concerns with legitimate corporate ends and the preservation of economic benefits with the international economic and political allies of the U.S.

In another notable case involving state foreign investment laws, Arkansas Gov. Sarah Huckabee Sanders ordered the Chinese-owned agricultural company,&nbsp;Northrup King Seed Co., with parent company China National Chemical Company,&nbsp;to divest all of its land holdings in Arkansas, on the ground that its parent company had been sanctioned by the Treasury Department as a so-called Chinese military-industrial complex company. Furthermore, the company was penalized $280,000 for the failure to report its foreign ownership in a timely manner.

In September 2023, the Department of the Treasury, as chair of CFIUS, added eight military bases to the list of bases that are covered real estate under the rules described above.

The list includes Grand Forks Air Force Base, which was at the center of the Fufeng matter alluded to above, involving the acquisition by a Chinese-owned company of 300 acres within 12 miles of the base, as part of an effort to establish a corn mill. That transaction was outside of CFIUS' jurisdiction at the time, although the Grand Forks City Council ultimately nixed the project.

This year, it is likely there will be a push in Congress to amend the Defense Production Act to empower CFIUS to review transactions involving agricultural property, based on concerns over food security.

More particularly, a January 2024 report by the U.S. Government Accountability Office may catalyze efforts in this respect.[3] Specifically, the GAO report found significant weaknesses concerning the quality and timeliness of data regarding foreign investments in agricultural land.

The report referenced the Air Force playbook that was formulated "to identify and review national security risks related to foreign investments in agricultural land near Air Force installations."[4]

This playbook is an educational tool that is to be used to assist both federal and state officials in effectively assessing and managing the risks of any foreign investments located close to military establishments. Ultimately, it is envisioned that the playbook will "educate military and civilian stakeholders about the CFIUS process and help mitigate any potential national security risks before the CFIUS process begins."

Agricultural Foreign Investment Disclosure Act

AFIDA, along with its regulations, requires foreign persons and entities who acquire, transfer or hold a direct or indirect interest in U.S. agricultural land to report their holdings and transactions to the secretary of agriculture.

On Dec. 15, 2023, the U.S. Department of Agriculture proposed an update to its regulations that would expand the reporting form in order to gather geospatial information, including data on long-term lessees and data to assess the impacts of foreign investment on agricultural producers and rural communities.

While this is only a proposal for public comment, it will be important to track this legislation for its passage, especially for purposes of determining the reach of CFIUS over leases or licenses on real property.

The January 2024 GAO report noted above found that the USDA's "processes to collect, track, and report key information [under AFIDA] are flawed."

Congressional leaders have recently communicated concerns about the quality and timeliness of information that has been reported under AFIDA, and, in a 2022 letter to the GAO, expressed concern "that estimates of foreign ownership of agricultural land may be underreported due to the data's lack of reliability and the definitions used to report foreign ownership."[5]

Commentators have cited the following issues with AFIDA data, among others:

Antiquated process of collection of data on paper forms with excessive bureaucratic levels of review from county and federal offices;

Errors and inaccuracies in the data, such as double-counting of certain Chinese acquisitions;

Incomplete data that does not reveal the country of so-called additional foreign persons, beyond the primary investor; and

Failure to enforce penalties for violations of the statute.

Another knock against AFIDA data by the GAO is that the USDA does not regularly share the data with CFIUS agencies on a timely basis for it to be useful for CFIUS reviews.

The USDA had issued a prior memorandum wherein it admittedly failed to assess or penalize failures to report foreign acquisition of U.S. agricultural land between 2015 and 2018.

The result of these shortcomings in data collection, tracking and reporting by the USDA has played a role in the proliferation of both federal and state legislation aimed at bolstering the regulation of foreign investment.

In the 2020s' new age of conflict and great power competition, it will be interesting to see how restrictions over foreign investments in U.S. real estate develop at both the state and federal levels.

Certainly, what we do know is that early diligence is imperative for any U.S. transaction relating to foreign ownership or control of real estate.

Whether as a buyer, seller, lessee, licensee or investor, all real estate transactions by a foreign actor must first include an analysis to ascertain whether the transaction will implicate federal or state foreign investment laws, including with respect to the nature and location of the real estate, the citizenship of the salient parties to the deal, and the structure of the underlying transaction.

"How Recent Laws Affect Foreign Purchase of U.S. Real Estate," by Massimo F. D'Angelo and Anthony Rapa was published in&nbsp;<a href="https://www.law360.com/articles/1797105">Law360</a>&nbsp;on February 14, 2024.

How Recent Laws Affect Foreign Purchase of U.S. Real Estate

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