To Foreign Purchasers Of U.S. Real Estate – You May Not Be Allowed To Keep It
December 3, 2013
Many real estate attorneys probably never heard of the Exon-Florio Amendment or CFIUS, much less imagined that, under them, a foreign real estate purchaser may be forced to divest the property post-closing. However, recently, the U.S District Court for D.C. held, in the Ralls case , that the Amendment gives the President of the U.S. practically unchallengeable authority to require divestiture in a “covered transaction”, and, absent pre-clearance, to do so at any time.
A “covered transaction” is defined as “any merger, acquisition, or takeover . . . by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.” 50 U.S.C. app. §2170(a)(3). Thus, a “covered transaction” includes almost every direct or indirect acquisition of U.S. real estate by a foreign person, except, possibly, a personal residence or raw land used only for local purposes. The Amendment authorizes the President “to suspend or prohibit any covered transaction that threatens to impair the national security of the United States . . .” if the President has made certain related findings. §§2170(d)(1) and (4). Under Ralls, that includes ordering divestiture.
Ralls Corporation, the Purchaser in that case, was a Delaware corporation (“Ralls”) owned by two Chinese nationals. It acquired control of four windfarm projects (consisting of easements, power purchase agreements, interconnection agreements, and governmental permits) pursuant to which Ralls planned to install turbines, manufactured by its Chinese affiliate, to serve U.S. power companies. Three of the windfarm project sites were located within seven miles of U.S. Navy restricted airspace. The fourth site was located within the restricted airspace. The President found that Ralls “might take action that threatens to impair the national security of the United States” and ordered Ralls to remove any turbines and to sell the properties. The President did not reveal the grounds for his decision. The Court held that Ralls was not entitled to such an explanation. The Court held that Ralls was entitled only to such procedural due process as was due under the circumstances, which appears to have consisted of only an opportunity to provide arguments and materials, including a meeting with the applicable governmental officials, without knowing the specific grounds for the national security concerns. The Court went on to say: “There is no statute of limitations, the transaction can be unwound at any time” after the transaction closed.
From a real estate point of view , the take-aways, from the Ralls decisions seem to include:
1. Seek a pre-clearance or take the risks of divestiture. A foreign person proposing to purchase U.S. real estate may seek a pre-clearance of the acquisition. §2170(b)(1)(C).  Ralls relies heavily upon the fact that Ralls failed to do so. Even though the Amendment imposes relatively short deadlines upon CFIUS and the President to respond to such a request, those deadlines may be long enough, in a particular case, to put the foreign person at a competitive disadvantage in bidding.
2. Potential vastness of the real estate covered. Ralls apparently had a history of knowing about possible CFIUS issues regarding airspace. However, the problem with including real estate is that real estate encompasses an infinite range of possibilities, particularly in the Washington, D.C. area – office buildings housing sensitive U.S. Government facilities, properties within spying or shooting distance of sensitive U.S. Government facilities or access thereto, the residences of U.S. Government employees having access to sensitive information, etc., to say nothing of areas within seven miles of restricted airspace. Therefore, the parties to such transactions need to consider a broad range of possibilities.
3. Which country matters. Operations, by Chinese nationals, upon land near or within restricted airspace, could have been seen as a particular concern at the time of the Ralls decisions. See “Confidential report lists U.S. weapons system designs compromised by Chinese cyberspies”, Washington Post, May 27, 2013, which states: “In addition, a recent classified National Intelligence Estimate on economic cyber-espionage concluded that China was by far the most active country in stealing intellectual property from U.S. companies.” That and a subsequent article list military aircraft designs as among the technologies allegedly stolen by Chinese nationals. “The U.S. weapon systems that experts say were hacked by the Chinese”, Washington Post, May 28, 2013. See the factors set forth in §2170(f) as they would apply to China. Those factors include some country distinctions. I do not know whether any of those country distinctions apply to China. However, the regulations do not set forth particular country distinctions. 31 CFR §§800.101, et seq.
4. Watch out where there are multiple owners or managers of the Purchaser. If foreign persons have direct or indirect ownership interests in, or management authority over, the purchaser, you need to check the broad definition of “control” in 31 CFR §800.204.
 Ralls Corporation v. Committee on Foreign Investment in the United States, 926 F. Supp. 2d 71 (U.S. Dist. Ct. for D.C.), 2013 U.S. Dist. LEXIS 24344 (as amended February 26, 2013), and Ralls Corporation v. Committee on Foreign Investment in the United States, 2013 U.S. Dist. LEXIS 145949 (U.S. Dist. Ct. for D.C., as amended October 10, 2013, both of which are now on appeal to the U.S. Court of Appeals for the D.C. Circuit as Case No. 13-1513.
 The Amendment singles out “foreign government-controlled transaction[s]” and “control of any critical infrastructure” for special treatment. §2170(b)(2)(B)(i). Furthermore, §2170(f) gives the President wide latitude as “Factors to be considered”, even though real estate location is not specifically listed as one of those factors. Still further, under Ralls, the President need not provide even a colorable basis for his/her decision. Therefore, I cannot tell whether the President’s decision in this case was actually based upon political considerations, the possibility that the turbines could be infected with viruses or back doors to trigger failure, or other considerations, especially since the President’s Order addresses both the real estate and the turbines themselves. However, the Ralls’ Orders are broad enough to cover real estate location and the case seems to stem from the U.S. Navy’s initial objection based upon the location of the windfarm projects in relation to its restricted airspace. Therefore, this article is based upon Ralls’ apparent application of the Amendment to real estate location.
 Obviously, such a pre-clearance does not protect the foreign person from that person’s own misrepresentations or breaches. §2170(b)(1)(D). However, despite such statutory limitations and some language in Ralls to the contrary, I doubt that there can be any assurance that the Government would be estopped, from re-opening an investigation, based upon new evidence or a new view of the potential threats involved.