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Know Thy Neighbor as Thyself: CFIUS Considerations in Commercial Real Estate Transactions
Tuesday, June 11, 2024

While many venture capitalists and private equity sponsors are aware the Committee on Foreign Investment in the United States (“CFIUS”) has authority to review inbound investments in certain sensitive U.S. industries, many transaction parties may be unaware of CFIUS’s jurisdiction to also review the national security risks presented by real estate transactions involving foreign persons. Because real estate transactions do not trigger CFIUS’s mandatory filing requirements, it is uncommon for transaction parties to proactively seek CFIUS review of these deals.

However, real estate industry stakeholders—such as investors, landlords, and portfolio managers—should be aware that President Biden recently released an Executive Order (“EO”) ordering Chinese-backed cryptocurrency mining company MineOne Partners Limited (“MineOne”) to divest its acquisition of real estate located in close proximity (less than one mile) to Francis E. Warren Air Force Base (“Warren AFB”) in Wyoming. Notably, several strategic missile silos are located at WFB, including silos housing the Minuteman III intercontinental ballistic missiles relied on as a key component of the U.S. nuclear triad.

MineOne acquired the Wyoming real estate at issue in June 2022 and then improved the property with specialized cryptocurrency mining operations. Acting on a public tip, CFIUS reviewed the transaction and determined that the “proximity of the foreign-owned Real Estate to [Warren AFB], and the presence of specialized and foreign-sourced equipment potentially capable of facilitating surveillance and espionage activities, presents a national security risk to the United States.”

Pursuant to the EO, CFIUS ordered the transaction unwound and imposed an aggressive divestment timeframe on MineOne. Specifically, MineOne was required to remove its equipment and the property improvements within 90 days, fully divest its ownership stake within 120 days, and certify its compliance with the EO’s mandates to CFIUS on a weekly basis.

Key Takeaways: CFIUS continues to use all of the tools at its disposal—including unwinding closed deals—to address risks to U.S. national security, including real estate transactions that do not involve an acquisition or investment in a U.S. business.

  • Location, Location, Location. While it is uncommon for CFIUS to review “non-notified” real estate transactions, sellers and landlords should be aware that properties located in geographies with a high density of key U.S. military installations (e.g., Southern California) or sensitive government facilities (e.g., Northern Virginia) can trigger close scrutiny from CFIUS when foreign buyers or investors are involved. The online tool CFIUS makes available to determine proximity to these sensitive facilities is helpful but somewhat cumbersome—we encourage transaction parties to consult with experienced CFIUS counsel when assessing the CFIUS implications of a transaction involving a particular property or real estate portfolio.
  • Mitigation Difficulties. Although CFIUS prefers to mitigate national security risks via national security agreements imposing certain operational and ownership conditions on buyers or investors, these agreements are often less effective when the mere ownership of the real estate is the source of the threat. In other words, a forced sale is often CFIUS’s only available tool to ameliorate a significant national security risk in these transactions. As a result, we strongly encourage real estate transaction parties to engage with CFIUS early in the deal cycle if the subject property is located near sensitive USG facilities and there is foreign capital financing the acquisition.
  • CFIUS KYC. Although the due diligence process for real estate transactions can already be quite burdensome on transaction parties, we encourage sellers and landlords to review the ownership structure of any buyers or investors as part of the general “Know Your Customer” and Anti-Money Laundering procedures that most sophisticated transaction parties already have in place.
  • State Restrictions on Foreign Real Estate Acquisitions. Many states have begun restricting the ability of foreign capital to acquire real estate. As this issue grows in political importance and additional state legislation is proposed, transaction parties should continue to closely monitor this evolving body of law and its impacts on real estate dealmaking.
  • Near Term Foreign Investment Trends in Commercial Real Estate. Although foreign investors may be cooling on the commercial real estate market in the U.S., the twin impacts of cratering prices per square foot for commercial office space in many U.S. cities and the potential interest rate cuts by the U.S. Federal Reserve later this year could create attractive acquisition and investment opportunities for foreign investors who may otherwise have been sitting on the sidelines given recent market conditions. We encourage transaction parties to carefully consider property location and the citizenship of the buyer or fund when evaluating CFIUS risk for any real estate transaction.

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The MineOne EO underscores the importance of proactively assessing CFIUS risk for real estate transactions and the ability of CFIUS to swiftly address national security threats with severe consequences for transaction parties.

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