PDF DownloadSovereign Wealth Funds and U.S. Real Estate Investment
By David Alan Richards

Probate & Property Magazine: July/August 2009, Volume 23, Number 4

Real Property|Trust & Estate

David Alan Richards is a partner in the New York, New York, office of McCarter & English and a past Chair of the Section of Real Property, Trust and Estate Law.

Given the credit crisis in the American economy, with paralysis in U.S. capital markets preventing domestic buyers from financing commercial real estate purchases in the ordinary course, American real estate sellers increasingly view sovereign wealth funds (SWFs) without a need to borrow as potential buyers. These SWFs—entities established or controlled by a sovereign government and funded with foreign currency that is normally invested in overseas assets for the long-term—are flush with cash, mostly from the now-ended (or at least interrupted) era of high oil prices that resulted in an accumulation of wealth. As evidenced by last year's SWF investments in the Chrysler Building (Abu Dhabi Investment Authority, $800 million, for a 90% stake) and the General Motors Building (Kuwait and Qatar Investment Authorities, $1.12 billion, a 40% stake) in New York City, many SWFs are now searching for investment alternatives to U.S. Treasury bills and other such risk-free bonds, which formerly helped absorb these large global imbalances.

The New Regulations

New Department of the Treasury Regulations for the first time explicitly include the acquisition of U.S. real estate in the definition of "covered transactions" that may possibly require pre-closing review by the federal government's 14-member, inter-agency Committee on Foreign Investment in the United States (CFIUS). Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702 (Nov. 21, 2008) (eff. Dec. 22, 2008) (codified at 31 C.F.R. Part 800). The consequences are dramatic. Now, if an investment in American real estate requires review by CFIUS, and application is not made or approval not received, the transaction under contract may be blocked or, if already closed, even reversed by the President of the United States. Several foreign acquisitions (none involving only real estate) have been restructured in CFIUS mitigation proceedings, and others have been withdrawn before being formally denied. See David Marchick & Matthew Slaughter, Global FDI Policy: Correcting a Protectionist Drift , CSR No. 34, June 2008, Council on Foreign Relations, at 29.

The question for the real estate industry and its legal practitioners is whether the prospect of heightened CFIUS review will deter SWFs that desire to put petro-dollars into American soil. Will a protectionist reflex, in response to perceived political rather than commercial threats, block the otherwise desirable flow of foreign investment funds into an asset class starved for such investment?

Foreign investment in U.S. real property has been subject to increasing regulations during the last three decades, from the International Investment and Trade in Services Survey Act of 1976, Pub L. No. 94-472, 90 Stat. 2059 (IISA), through the Agricultural Foreign Investment Disclosure Act of 1978, Pub. L. No. 95-460, 92 Stat. 1263 (codified at 7 U.S.C. § 3501 et seq.) (AFIDA), the Foreign Investment in Real Property Tax Act of 1980, Pub. L. No. 96-499, 94 Stat. 2682 (FIRPTA), and the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324 (TEFRA). This federal legislation itself is layered on top of historical state restrictions on such inward investment. See American Bar Ass'n, Real Property, Probate and Trust Section, Foreign Investment in U.S. Real Estate: A Comprehensive Guide (Timothy Powers ed., 1990). The aims of these older federal enactments were varied. Some legislation was designed to gather information about the volume and sources of foreign investment (IISA and AFIDA). Other statutes were meant to prevent nonresident alien persons and entities from escaping the capital gains taxes imposed on American real estate sellers similarly situated (FIRPTA and TEFRA). None of these earlier laws, however, permitted the government to block any particular acquisition or to demand potentially public exposure of information about the property buyer and its investment motives, and none mentioned "national security."

Unlike these prior federal legislative restrictions, the new CFIUS regulations are not primarily commercial or economic in nature. Their objectives are political or even military, and they would almost certainly not have been enacted without the national trauma of 9/11. These regulations are an outgrowth of the Foreign Investment and National Security Act of 2007 (FINSA), Pub. L. No. 110-49, 121 Stat. 246 (effective Oct. 24, 2007), which expanded the scope of the Exon-Florio Amendment of 1988 to the Defense Production Act of 1950, 50 U.S.C. app. 2170. Under Exon-Florio, the President of the United States is authorized to suspend, prohibit, or reverse any transaction that might result in foreign control of a U.S. business if national security interests would be impaired. FINSA added to the range of CFIUS considerations the question of whether foreign governments controlling SWFs are in compliance with U.S. and multilateral counterterrorism, proliferation, and export control regimes.

CFIUS was established in 1975, is chaired by the Secretary of the Treasury, and includes the Attorney General, the Secretaries of Homeland Security, Commerce, Defense, State, and Energy, the U.S. Trade Representative, the Director of the Office of Science and Technology Policy, the Director of the Office of Management and Budget, the Chairman of the Council of Economic Advisors, and three assistants to the President. See 73 Fed. Reg. 70,702. CFIUS is tasked with reviewing these proposed commercial transactions for national security implications, but neither the Defense Production Act as amended nor the new CFIUS regulations define "national security" or "homeland security." This leaves CFIUS with broad discretion to decide whether a real estate acquisition that is a "covered transaction" has such security implications.

Sovereign Wealth Funds

Sovereign wealth funds have been investing in the United States, largely without public discussion, let alone significant challenge, for more than three decades (the first seems to be the Kuwait Investment Board, established in 1953). In publicly disclosed equity transactions in 2007 alone, SWFs invested $92 billion throughout the world (almost 31 times their aggregate investment in 2000). With control of $3 trillion in worldwide assets, the net worth of the SWFs taken together equate to the fourth largest economy in the world, after the European Union, the United States, and Japan. Before the autumn 2008 collapse in the world economy, this number was expected to more than triple by 2012. See Susan B. Bastress, Sovereign Wealth Funds: Applicability of CFIUS to Investments in US Real Estate , in Continuing Professional Education Proceedings of the American College of Real Estate Lawyers, Annual Meeting, October 23–25, 2008, at 47; International Monetary Fund, Sovereign Wealth Funds—A Work Agenda (Feb. 29, 2008), www.imf.org/external/np/pp/eng/2008/022908.pdf .

A report by the consulting firm Monitor Group of Cambridge, Massachusetts, analyzed 33 years of reported investments of sovereign wealth funds, identifying 1,100 transactions with an aggregate value exceeding $250 billion. Monitor Group, Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy (June 9, 2008), www.monitor.com/sovereignwealth (follow hyperlink to report). According to this study, these SWFs, far from being primarily passive investors, sought "controlling" interests, majority ownership or board seats, or contractual rights to vote in decisions on material matters in a substantial number of acquisitions from 2000 onward.

9/11 and New Law

Most Americans were probably unaware of CFIUS and its mission until the Dubai Ports World transaction in 2006. This transaction, which had actually been approved by CFIUS, became a highly public controversy, over the prospect of having a Middle Eastern country—Dubai, a member of the United Arab Emirates—operating U.S. ports of entry through acquisition of a United Kingdom company that supplies port management services. It followed a similar debate in July 2005, when China's National Offshore Oil Corporation made an unsolicited bid for Unocal.

The Dubai Ports World controversy sparked a call for closer scrutiny of transactions respecting sensitive security assets such as seaports, which led to Congress's passage of FINSA in October 2007. FINSA made three major changes in the scope of Exon-Florio: first, reviews of foreign transactions involving both "critical technologies" and "critical infrastructure" were explicitly included; second, changes were made to CFIUS's method of review of "foreign government-controlled transactions" if such a government or an entity controlled thereby would acquire control of a U.S. business; and third, as eventually detailed in the new CFIUS regulations, the operation of improved real estate—whether a single shopping center, an office building, or even a warehouse—was formally and explicitly included in the definition of a "U.S. business." See FINSA § 2(a)(4), (6), and (7). Now, any such proposed transaction with an SWF is automatically required to go through both an initial 30-day review period and a second-tier 45-day investigation, unless the Secretary of the Treasury and the head of CFIUS's lead agency (which may be Treasury or another agency, depending on the nature of the proposed investment) jointly issue a written finding of no adverse impact on national security. 73 Fed. Reg. 70,702. For purposes of CFIUS review under FINSA, SWFs are defined as "foreign government entities." See 31 C.F.R. §§ 800.213, 800.214.

Before FINSA's passage, the acquisition by a foreign person of 10% or less of an entity's voting securities was widely considered to be exempt, but FINSA has clarified (if that is the word) the definition of "control" by adding a negative test: that there be evidence that the acquisition's purpose is "solely for investment." The new CFIUS regulations are a further effort to explicate those fact patterns that trigger the requirement for CFIUS review, with detailed definitions of (among other words and phrases) "covered transaction," "foreign person," "control," and "U.S. business."

Despite the new definitions, the overall scheme promulgated by the Treasury Department in the new CFIUS regulations promotes only subjective determinations, after consideration of all relevant factors, with few bright lines or clearly safe harbors. CFIUS could not possibly review all potential U.S. acquisitions by foreign investors and certainly does not want to do so. Instead, it leaves final judgment about whether to file for such review to the asset sellers, their foreign potential buyers, and the parties' respective counsel.

The CFIUS Application Process

CFIUS may itself initiate a unilateral review of a transaction of which it has become aware through press reports or otherwise. But requesting a filing before or after a transaction has closed or applications for review by potential buyers or sellers are voluntary; there is no requirement that the parties to a "covered transaction" submit a notice to CFIUS. Confidentiality in the CFIUS review process is promised but seemingly not guaranteed. Although CFIUS does not issue opinions or make public disclosures about its notifications to participants in the review process, and information gathered is exempt from discovery under the Freedom of Information Act, disclosure is permitted and thus possible in connection with a congressional hearing or an administrative or judicial proceeding.

Testing the waters before filing an application is possible. The CFIUS regulations encourage the parties to consult with CFIUS staff and member agencies on an informal basis even before filing a voluntary notice (which the Treasury estimates requires about 100 hours of filer preparation time, 73 Fed. Reg. 21,867 (Apr. 23, 2008)). If, in response to a voluntary notice, CFIUS determines that the transaction is not a "covered transaction" or is a "covered transaction" but decides not to recommend that the President act, then presidential authority to block the transaction or to order divestment will not be exercised. 31 C.F.R. § 800.601. If the proposed real estate transaction arguably has "national security" implications, then it may be a "covered transaction," and filing a voluntary notice under 31 C.F.R. § 800.401 is highly recommended.

If a transaction party, with or without CFIUS guidance in response to a voluntary notice, decides CFIUS review is warranted (or, given the potential negative consequences, just prudent), it must file an application with CFIUS, transmitted in hard copy and by e-mail. There is no filing fee. With application for the "covered transaction" in hand, CFIUS conducts a 30-day review to determine the potential for impairment (probable or possible) of American national security interests. If CFIUS suggests measures that could mitigate or otherwise avoid potential threats identified by the review, the parties are encouraged to negotiate with the lead agency and enter into a written mitigation agreement. In 2003, for example, a mitigation agreement was negotiated for Global Crossing Ltd.'s transfer of communication systems to a Singapore company. The agreement consists of 35 closely printed pages and was signed not only by the transaction parties but also by the Federal Bureau of Investigation, the Department of Justice, the Department of Defense, and the Department of Homeland Security. Unusual for such agreements, this one was made public, for reasons related to licensing by the Federal Communications Commission, and is available on the FCC web site. In re Global Crossing , 18 F.C.C.R. 20,301 (Oct. 8, 2003). Not surprisingly, post-acquisition breaches of a mitigation agreement allow the imposition of substantial penalties and sanctions.

If threats are identified and measures to mitigate are not agreed to by the parties, a more intensive 45-day "investigation" ensues. As mentioned, this second-tier review now occurs automatically when an SWF is involved but is abortable if the SWF volunteers to mitigate in mid-investigation. FINSA § 2(5). When the CFIUS investigation is completed, the President of the United States has an additional 15-day period to review the findings. The President may take any action recommended by CFIUS or that the President deems necessary, which can include suspending or even nullifying the transaction. If an acquisition for which no CFIUS application was made comes to the attention of CFIUS after it has closed and CFIUS recommends that it be blocked, in the case of a transaction, the President has the power to compel its reversal.

CFIUS, SWFs, and Real Estate

As noted above, the new CFIUS regulations have the potential to reach any American real estate transaction in which an SWF is involved. Thus, the parties to the transaction (and their respective counsel) must carefully analyze the transaction to determine whether it warrants a voluntary notice or application for CFIUS review.

This is a judgment call, and the risks of a misjudgment either way are patent. If election is made by the American seller and the SWF buyer not to file a voluntary notice or to apply for CFIUS review, on the grounds that national security interests are not implicated, rival bidders or CFIUS itself might take a different view, leading to a fight, perhaps a public one. Alternatively, the mandated statutory review and investigation periods necessarily mean that submission of a proposed transaction to CFIUS review involves significant time passage if not delay, otherwise avoidable administrative costs and legal fees, and potentially adverse political (and again public) controversy that could kill or significantly alter the deal. Any sale that could not be unwound with the original seller would then become a distress sale by the SWF. Also, mitigation measures might be demanded by CFIUS that alter the economic calculations of one or both parties (such as retaining professional property managers as proof that the acquisition is "solely for investment purposes"). Furthermore, the CFIUS regulations subject the SWF buyer to new disclosure requirements in the application process, far beyond anything required under IISA and AFIDA. The additional requirements include a structural graphic identifying parent entities in the chain of beneficial control and biographical information about the SWF's board of directors, senior management members, and ultimate beneficial owners with stakes of 5% or more. 31 C.F.R. §§ 800.402(a)(1)(v)(A), 800.402(c)(6)(vi).

Reporting Guidelines Through Definitions

What help does the text of the CFIUS regulations give to a real estate lawyer seeking to advise an American real estate owner-client on whether submission to the CFIUS process is mandatory, or even merely prudent? Such guidance is to be found there but only after methodically and doggedly running the gauntlet of the applicable definitions of the regulations' key terms.

The CFIUS regulations do not specifically define "national security" or its analogue in the regulations, "homeland security." If the U.S. realty is acquired as an incidental part of the acquisition of the owner/occupant of the property that is a "U.S. business," then it seems reasonable to assume that CFIUS analysis will be informed primarily, though not exclusively, by the "national security" and "homeland security" aspects of the operations of the owner's U.S. business. The regulations, however, lack any specificity in considering whether the purchase of a building is a "covered transaction" if the owner-occupied building is without "homeland security" issues or implications, or if it is leased to one or more tenants with such issues or implications, or if it is leased only to tenants without any such issues or implications. CFIUS is apparently preparing material for public guidance on what transaction types have raised "national security" and "homeland security" issues during past CFIUS reviews. Nevertheless, comprehending the phrases "national security" and "homeland security," in the analysis of the appropriateness of the transaction at hand for federal review, is presently an exercise in the application of common sense and past experience only.

After considering "homeland security" issues, if the incoming controlling interest of the analyzed real estate acquisition is not 100%, it may be necessary to review the question of "control." The new CFIUS regulations set forth facts and circumstances under which much less than 50% of overall voting power can constitute control and trigger the review and investigation requirements. 31 C.F.R. § 800.204. Unlike the bright-line definition of control in many Internal Revenue Code provisions, the CFIUS regulations define control as:

the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity; in particular, but without limitation, to determine, direct, take, reach, or cause decisions regarding the following matters, or any other similarly important matters affecting an entity,

and the very first such matter is "(1) The sale, lease, mortgage, pledge, or other transfer of any of the tangible or intangible principal assets of the entity, whether or not in the ordinary course of business." Id. Frankly, it is hard to imagine an SWF investing in American real estate without the power to "control" the disposition of that primary asset, and in any real estate partnership or joint venture a partner with access to its own armed forces and security services would probably have control in any sense of that word.

The next key concept, when the sale is not simply of the improved real estate to a special purpose entity formed by the SWF for its acquisition, is that of a " U.S. business." The new CFIUS regulations define a " U.S. business" as any "entity" engaged in interstate commerce in the United States. 31 C.F.R. § 226. They define "entity" to include effectively any corporation or corporate division, partnership, branch, government agency, or other organization formed under U.S. or foreign law, and any assets operated by any of the foregoing as a business undertaking in a particular location, even if those assets are not organized as a separate legal entity. 31 C.F.R. § 211. Given the holding in Jones v. United States, 529 U.S. 848 (2000) (federal statute covering any building used in "any activity affecting interstate or foreign commerce" excludes owner-occupied houses, but includes rental buildings), it seems doubtful that the "interstate commerce" qualification on characterization as a "U.S. business" would exclude commercial rental real estate, or even residential rental real estate, although it would seem to exclude owner-occupied houses—if the proximity of such houses to "critical infrastructure" does not raise "national security" issues.

There seems to be no question that "national security" is at issue if the real estate asset to be acquired consists in whole or part of "critical infrastructure" or houses the manufacture or storage of "critical technologies." Under the new regulations, "critical infrastructure" is defined as meaning "a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset of the entity over which control is acquired pursuant to that covered transaction would have a debilitating impact on national security." 31 C.F.R. § 800.208. The CFIUS regulations do not relate its definition to specific industrial sectors. Although the President's National Strategy for the Physical Protection of Critical Infrastructure and Key Assets, published by the White House in February 2003, www.dhs.gov/xlibrary/assets/Physical_Strategy.pdf, does not include rental real estate as one of the 13 specified industry sectors, it does speak of "key assets," including prominent office buildings (460 skyscrapers), shopping centers, sports stadiums, and important privately owned buildings.

"Critical technologies" include defense articles or defense services; items controlled under multilateral regimes for reasons of national security, such as chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology, "as well as those that are controlled for reasons of regional stability or surreptitious listening"; nuclear equipment, components, material, software, and technology; and federally designated select agents and toxins. 31 C.F.R. § 800.209.

The final and most fundamental definition in the CFIUS regulations, and the simplest to understand, is "transaction." Its definition includes, among other things, the proposed or consummated acquisition of an ownership interest in an entity or the formation of a joint venture. 31 C.F.R. § 800.224.

Real Estate Transaction Types

The treatment of exemplary real estate transactions (or their analogues) and whether they are deemed to be "covered" is to be found at scattered places in the new CFIUS regulations. Real estate lawyers, of course, will default to thinking instead about the various types of property that might be purchased.

1. For owner-occupied real estate , a transaction involving the acquisition of "control" of a " U.S. business" that is not involved in rental property in this country, whether or not it incidentally owns and occupies U.S. realty, is definitely a "covered transaction. 31 C.F.R. § 800.207.

2. In an unusual burst of clarity, the regulations specifically exclude unimproved land , if acquired singly with no other assets, from characterization as a "covered transaction," because such land is not a " U.S. business." 31 C.F.R. § 800.302(c), ex. 1, subsection (b). A variation on this theme is to be found in 31 C.F.R. § 800.301(c), which purports to cover transactions that result or could result in control by a foreign person of any part of an entity or of assets, if such part of an entity or assets constitutes a U.S. business. Example 3, however, excludes from covered transactions a "start-up or ‘greenfield'" investment in the United States, when a U.S. subsidiary is newly formed by a foreign parent to establish a U.S. operating business and the subsidiary separately acquires unimproved land for the construction of a plant for the new business, while also procuring separately from other vendors and sources the necessary supplies, technology, and operating personnel. Id. Again, because the bare land is not itself a "business" and does not at the time of acquisition support a "business," the acquisition is not one of a U.S. business under the definition.

3. As for currently unused buildings , the regulations contain two examples, with a fact pattern varied in the second to suggest the range of considerations in determining whether the purchase of such an improved property is a "covered transaction." Example 6 in 31 C.F.R. § 800.301(c) speaks of the acquisition, from a corporation that is a U.S. business, of an empty warehouse facility. If the acquisition is limited to the physical facility alone "and would not include customer lists, intellectual property, or other proprietary information, or other intangible assets or the transfer of personnel," and there are no other "relevant facts," "the facility is not an entity and therefore not a U.S. business, and the proposed acquisition of the facility is not a covered transaction." Of course, the "relevant facts" could be the proximity of the facility to critical infrastructure.

Example 7 assumes the same facts, but now has the buyer acquire "the personnel, customer list, equipment, and inventory management software used to operate the facility." Id. The example concludes that, under these altered circumstances, the foreign investor is indeed acquiring a U.S. business, and thus this is a covered transaction. It should be noted that the assumed facts in example 5 of 31 C.F.R. § 800.302(c) suggest that the acquisition would be a "covered transaction" if the warehouse and personnel were idle for a year because of the seller's bankruptcy at the time of the foreign person's acquisition, but the warehouse and its equipment were still in working condition and the customer list and software were still current and key personnel had agreed to return if the warehouse were reopened.

The differences between 31 C.F.R. § 800.301(c)'s examples 6 and 7 are relatively easily understood, but neither of them gives a clear answer on the much more common acquisition of a vacant U.S. commercial rental building following the departure of its most recent 100% tenant, with no employees, or inventory management software or specialized equipment required to rent the building anew.

4. Buildings leased to tenants , such as a commercial office building or shopping center actively operated by employees of the owner, seem clearly intended to be covered by the new CFIUS regulations, by analogy to the warehouse in example 7 cited above. Nowhere does 31 C.F.R. Part 800 discuss the rental to one or more tenants of a building as necessarily constituting a " U.S. business." But 31 C.F.R. § 800.211 (when combined with the definition of " U.S. business" in 31 C.F.R. § 800.226) declares that "assets (whether or not organized as a separate legal entity) operated by [an entity] . . . as a business undertaking[s] in a particular location or for particular . . . services" are a " U.S. business."

5. What about a net leased building ? Income tax law holdings have found that very limited U.S. real estate rental activities, such as fee ownership of a single net leased building managed by independent contractors, do not rise to the level of a business. See Neill v. Commissioner, 46 B.T.A. 197 (1942); Rev. Rul. 73-522, 1973-2 C.B. 226. The CFIUS regulations, however, make no reference to this type of analysis or standard. Perhaps CFIUS would conclude that an SWF's acquisition of "control" of a net leased building is a "covered transaction," even though leased to a tenant not controlled by the foreign investor and even though operated by a separate management company not owned by the foreign investor. Alternatively, the parties to the transaction might argue that the purchase of a net leased building without the purchase of its tenant, the tenant's assets, the property management company, or other proprietary assets or systems of the tenant and without the employment of the building's personnel is not a "covered transaction" because the SWF does not own or control any of the business operations in the building. The argument continues that the transaction is more appropriately analogized to the empty warehouse of 31 C.F.R. § 800.301(c)'s example 6 cited above.

This argument for CFIUS avoidance is buttressed by the discussion of the foreign investor as tenant in the CFIUS regulations: "transaction" includes a "long-term lease under which a lessee makes substantially all business decisions concerning the operation of a leased entity, as if it were the owner." 31 C.F.R. § 800.224(f). Thus, if an SWF is a net lessee, making such decisions, its entry as tenant into such a transaction makes such entry a "covered transaction." It would be inconsistent for CFIUS to conclude that an SWF net lease landlord is making such decisions when the net lease terms are otherwise identical, so that purchase by an SWF of a net leased building (when the non-"controlled" tenant is making those same operational decisions) is likewise a covered transaction.

6. Forming a joint venture or partnership or other multi-party entity with an SWF is clearly a covered transaction, if the SWF might exercise the requisite "control." The regulations specifically describe a "joint venture in which the parties enter into a contractual or other similar arrangement, including an agreement on the establishment of a new entity, but only if one or more of the parties contributes a U.S. business and a foreign person could control that U.S. business by means of the joint venture" as a covered transaction. 31 C.F.R. § 800.301(d). This would seem to cover virtually every contribution of commercial (occupied) U.S. real estate into a joint enterprise (no matter the entity type) in which the SWF is the finance venturer or a controlling partner.

7. Because this article is about SWFs as investors in U.S. real estate, it does not discuss in detail (a) entry into a lease as tenant (see 31 C.F.R. § 800.224(f), with no further discussion or definition of what constitutes a "long-term lease"), or (b) entry into a lease as landlord (if the SWF already owns the rental building, this would not seem to be a "transaction," because the foreign person's right to receive periodic cash payments of rent from the U.S. business is not the acquisition of a "U.S. business"(compare example 2 in 31 C.F.R. § 800.301(d)), or (c) making a loan (31 C.F.R. § 800.303 holds that a "foreign person" lender such as an SWF, making a loan, even if secured by a mortgage, is not entering into a "covered transaction," absent other evidence of the acquisition of "control" at the date of the loan). The regulations go on to note that CFIUS will accept notices respecting review when "because of imminent or actual default or other condition, there is a significant possibility that the foreign person may obtain control of a U.S. business as a result of the default or other condition," so foreclosure of that loan may be blocked if "national security" is involved because the mortgaged asset is "critical infrastructure" or houses "critical technologies." 31 C.F.R. § 800.303(a)(1).

Going Forward

In its news release accompanying the first publication of the proposed rules in April 2008, the Treasury stated that "[t]hese regulations reflect America's strong and continued commitment to safeguarding U.S. national security in a manner that reinforces the longstanding U.S. policy of welcoming foreign investment." U.S. Dep't of Treasury, Treasury Issues Proposed CFIUS Regulations (Apr. 21, 2008) (quoting Ass't Sec. for Int'l Affairs Clay Lowery). Based on the number of filings in 2007–08, CFIUS expects an average of 120 notices annually (fewer than 10% of all foreign acquisitions of U.S. businesses are the subject of notification), of which not more than a dozen would be expected to be subject to protracted investigation or a mitigation agreement, 73 Fed. Reg. 21,868. CFIUS does not expect the new regulations to materially increase the number of transactions it reviews. 73 Fed. Reg. 70,702.

Citicorp Center in New York and Sears Tower in Chicago have both been alleged terror targets, discovered to have been slated for destruction on Al-Qaeda computers. To date none of the alleged plots had the terrorists first investing in such trophy buildings after filing biographical summaries with CFIUS. More seriously, CFIUS did not intervene in the Chrysler and GM Building investments in New York City by SWFs, so the fact that a building is occupied and can be destroyed is seemingly not by itself sufficient to raise a national security issue.

Thus, it seems unlikely that many real estate transactions will figure in the CFIUS process, although virtually all are now swept within the detailed CFIUS regulations' orbit. Clearly, whether or not presented in a voluntary notice of a proposed real estate purchase by an SWF, CFIUS is likely to take into account all the facts and circumstances, including, but not limited to, whether the building was a major structure or otherwise enjoys iconic status; whether the division of security responsibilities between landlord and tenants is unusual in any way; whether the nature of the business sector in which it (or its primary tenants) is employed evidences "national" or "homeland security" issues; whether the improved real estate itself is somehow "critical infrastructure"; and the past and present political reputation of the nation controlling the SWF. The counsel to the real estate's seller and buyer should make the same review in deciding how to proceed.

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