Takeaways

The Secure Federal LEASEs Act would require federal government agencies to obtain complete beneficial ownership information before leasing “high-security leased spaces” in foreign-owned buildings.
The requirements would be separate from, and, in addition to, information provided to the Committee on Foreign Investment in the United States (CFIUS) in connection with reviews of covered real estate transactions.

On December 31, 2020, the President signed the Secure Federal Leases from Espionage and Suspicious Entanglements Act (“Secure Federal LEASEs Act” or “Act”), a bill that requires federal government agencies to obtain complete beneficial ownership information before leasing certain “high-security leased space.”

In June 2019, Senators Gary Peters (D-MI), Ranking Member of the Senate Homeland Security and Governmental Affairs Committee, and Rob Portman (R-OH) introduced the Secure Federal LEASEs Act in response to a 2017 report published by the Government Accountability Office (GAO) which found multiple instances where federal agencies were unaware that they were occupying high-security office spaces in foreign-owned buildings. The GAO determined that the use of such spaces for classified operations and storage of law enforcement evidence and sensitive data, presented potential security risks of espionage and unauthorized cyber and physical access, as well as anti-money laundering concerns. Furthermore, if such facilities store classified or controlled unclassified information (CUI), there could be a risk to national security.

The Secure Federal LEASEs Act aims to close these security loopholes by requiring that the General Services Administration (GSA) or any federal agency that has independent statutory leasing authority (federal lessee) obtain information regarding the property owner prior to entering into a lease agreement or approving a novation agreement for a high-security leased space. Prior to the adoption of the Act, the GSA had begun to examine foreign ownership and control issues involving federal leases through its System for Award Management (SAM) registration requirements. The new Act enhances these existing SAM requirements. The Department of Defense and the intelligence community are exempt from the rule given existing beneficial ownership disclosure requirements for the agency pursuant to the 2018 National Defense Authorization Act.

High-Security Leased Spaces
The Secure Federal LEASEs Act requirements will apply to buildings that require compliance with the standards set forth in Facility Security Levels III, IV, or V.1 The Interagency Security Committee (ISC), a collaborative organization chaired by the Department of Homeland Security (DHS), is authorized to assign levels III, IV, and V to buildings with 80,000 or more square feet and more than 150 federal employees. Many federal leases in Washington, D.C. and other major metropolitan areas meet these security classification standards. The initial facility security level determination for a newly leased space is made based on a Facility Security Level Matrix composed of the following factors: mission criticality, symbolism, facility size, population, threat to occupant agencies, and intangibles. The tenant(s) are responsible for making the determination in consultation with the owning or leasing department or agency and the security organization that works with the facility. Risk assessments for high-security spaces are made at least once every three years.

Foreign Ownership Disclosure Requirements
Offerors will be required to include foreign ownership information in initial proposals in response to solicitations for offers issued by federal lessees. Specifically, offerors will need to disclose whether, as defined below, the immediate owner or the highest-level owner, including an entity involved in the financing, is a foreign person or entity as well as the associated country.

  • Immediate owner—an entity, other than the offeror of a lease, that has direct control of the offeror, including ownership or interlocking management, identity of interests among family members, shared facilities and equipment, and the common use of employees; or
  • Highest-level owner—the entity that owns or controls an immediate owner of the offeror of a lease, or that owns or controls one or more entities that control an immediate owner of the offeror.

The GSA will be required to share such disclosures with the federal tenant and hold consultations regarding potential security concerns and necessary mitigation measures prior to awarding the lease. The requirements will apply to a lease or novation agreement entered six months after the date of enactment and must be updated annually.

In addition to foreign ownership disclosure requirements, federal leases for high-security leased spaces will have to include language concerning access restrictions for the foreign owner and members of the property management company. The federal lessee will also need to have written procedures in place, signed by the lessee and the lessor, governing access to the high-security leased space.

GSA’s Government-Wide Plan
Pursuant to the Act, the GSA must develop and implement a government-wide plan to assist federal lessees with identifying the requisite ownership information within two years from the date of enactment. The GSA plan will require the disclosure of any immediate, highest-level, or beneficial owner that is a foreign person with certain exceptions (e.g., certain pooled-investment vehicles including widely-held vehicles, mutual funds, or trusts) to be defined in a forthcoming rule. The plan will mandate notification of disclosure(s) to the federal tenant. A beneficial owner is defined as a natural person who, directly or indirectly, through any contract or arrangement (i) exercises control over the covered entity; or (ii) has a substantial interest in or receives substantial economic benefits from the assets of the lessor which enables the person to, directly or indirectly, control, manage, or direct the lessor.

For the first nine years after implementation of the plan, GSA will be required to provide annual reports to Congress that detail the status of implementation and include the number of disclosures presented.

Secure Federal LEASEs Act and CFIUS
The requirements of the Secure Federal LEASEs Act are separate from the Committee on Foreign Investment in the United States (CFIUS) regulations in connection with reviews of “covered real estate transactions.” As of February 2020, CFIUS has broadened jurisdiction to review certain purchases, leases and concessions of real estate by foreign persons, even where there is no existing “U.S. business” as required under the traditional CFIUS framework.

CFIUS is an inter-agency committee led by the U.S. Treasury Department that reviews foreign investments for potential national security implications. Given that CFIUS actively seeks out transactions about which it is not notified, entities involved in lease transactions requiring foreign ownership disclosures to the GSA may want to consider whether they should voluntarily undergo CFIUS review for transactions within CFIUS jurisdiction to eliminate the risk of future CFIUS review and mitigation.


1 These classifications apply, respectively, to buildings with certain square footage and employee counts that are designated to store law enforcement data, agency intelligence, and classified information.

These and any accompanying materials are not legal advice, are not a complete summary of the subject matter, and are subject to the terms of use found at: https://www.pillsburylaw.com/en/terms-of-use.html. We recommend that you obtain separate legal advice.