Takeaways

U.S. Senators request GAO evaluate viability of CFIUS procedures in assessing national security concerns arising from foreign acquisition of U.S. real estate.
Rise of investments by Chinese buyers whose affiliations are unclear fuels interest.
GAO review may lead to proposed legislation increasing CFIUS scrutiny.

The expanding influx of foreign investments in U.S. real estate has drawn the attention of three key U.S. Senators amid national security concerns. Senators Ron Wyden (D-OR), ranking member of the Senate Finance Committee; Claire McCaskill (D-MO), ranking member of the Senate Homeland and Security and Government Affairs Committee; and Sherrod Brown (D-OH), ranking member of the Senate Committee on Banking, House and Urban Affairs, wrote a letter to the Government Accountability Office on May 16, 2017 (the Letter) requesting a review of how the Committee on Foreign Investment in the United States (CFIUS) examines real estate transactions, with a particular concern regarding Chinese investment. It appears the GAO has accepted the request and will commence its review.

The Letter comes at a time when foreign investments in U.S. commercial properties are at an all-time high. While the U.S. has historically been an alluring destination for foreign investors, investments peaked last year with over $60 billion funneled into acquiring U.S. commercial properties, encompassing 13 percent of U.S. real estate transactions overall, National Real Estate Investor reported earlier this year. The letter to GAO explains how Chinese investment in U.S. real estate is rising, and that certain investments have raised national security concerns. Examples of national security concerns cited include proximity to sensitive properties such as military bases or other government buildings, cybersecurity issues in connection with foreign-owned buildings leased to the U.S. Government, as well as the fact that President Trump and senior Administration officials retain real estate holdings that could be subject to future foreign acquisition. The senators further explain how “the ownership structures and political ties of prominent Chinese investors . . . are murky at best.” Overall, the senators pose 12 questions for the GAO to review, generally requesting the GAO provide recommendations on how to enhance the CFIUS review process for foreign acquisitions of U.S. real estate. Key questions include how CFIUS defines national security threats in real estate transactions, details on the number and type of real estate deals CFIUS has reviewed, and how CFIUS goes about reviewing such transactions.

With these national security matters at the forefront of U.S. real estate acquired by foreign parties, the GAO is charged with analyzing the implications from these transactions and evaluating whether CFIUS has an adequate process in place to consider the challenges that they pose. The Letter outlines a number of considerations for the GAO, a few of which are the: 

  • Ability of CFIUS to assess transactions under current regulations
  • Percentage of foreign acquisitions of U.S. real estate that have filed for CFIUS review
  • Information and processes used by CFIUS to assess national security.

Moving Forward

The recent request highlights the significant attention being paid to CFIUS reviews, as applied to real estate as well as foreign investment in the U.S. as a whole. Last year, the GAO announced it will examine whether CFIUS’ authority should be expanded to review transactions for concerns beyond national security. This action is in response to a request from several lawmakers for the GAO to examine how CFIUS is keeping pace with the growing scope of foreign acquisitions in the U.S. The GAO’s examination is currently underway, though it is unclear when the report will be released. While Congressional action would still be required for any changes to the authority of CFIUS or to the review process as a whole, it is possible the GAO’s report will lead to legislation proposing broadening the Committee’s national security mandate. This more recent GAO request could lead to changes in how CFIUS reviews and analyzes real estate acquisitions, in particular those involving Chinese buyers.

Take-Away

This recent activity highlights current congressional attention on foreign real estate acquisitions, especially involving Chinese state-owned sources. We understand the GAO has accepted the request for further review, and its report may ultimately result in recommendations to Congress on certain possible reforms to the CFIUS review process, though legislation would need to be passed to enact those recommendations.

Associate Robert L. Tian and summer law clerk Lisa Chan contributed to this alert.