Chinese investors buying real estate in the United States can expect heightened scrutiny amid an escalation of US-China tensions, analysts said. They might also contend with a new filing fee of up to US$300,000 imposed by the federal reviewing body.
The coming into effect of a new regulation that extends the Committee on Foreign Investment in the United States’ (CFIUS) scope to the review of even non-controlling stakes in US real estate could lead to a negative impact on Chinese and Asian investors.
“CFIUS now has jurisdiction over greenfield investments in real estate located near specific air or maritime ports, as well as sensitive government and military installations or military training and testing centres,” said Mark Uhrynuk, partner at law firm Mayer Brown’s corporate and securities practice in Hong Kong. “In light of increasing tensions with China, Asian and Chinese investors can expect heightened scrutiny of many investments into the US for the foreseeable future,” he said.
CFIUS, an inter-agency federal body, reviewed most foreign deals for national security implications. Its jurisdiction was, however, expanded to cover virtually all foreign direct investment into the US, including real-estate transactions by foreign persons that lead to non-controlling investments, with the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018. The new regulation came into effect on February 13 this year.
“We are not talking about outright acquisitions only here, we are talking investments below 10 per cent. This will spell disaster for those already in the [US] market, with capital deployed and waiting on more to come from abroad,” said Rick Mirza, the chief executive of Daulat, a US-based private-equity firm that manages real-estate holdings.
Starting in May, the committee has also started imposing a new filing fee for foreign investments, including those in real estate, which could pose a new hurdle for overseas investors. Under a new rule released by the US Treasury Department, which came into effect on May 1, a fee of up to US$300,000 will be required from parties filing a written notice of a transaction to be reviewed by CFIUS.
While the fee could be avoided by submitting a five-page declaration form instead, transactions by Asian and Chinese investors that were “sufficiently sensitive” were advised to opt for the longer notice and pay the new fee, said Mayer Brown’s Uhrynuk.
“For other Asian real-estate investors, however, while the new rules represent another regulatory hurdle, they can be navigated by carefully assessing CFIUS risk to a transaction early in the process,” said Ricky Yiu, partner at Mayer Brown’s real estate practice. “The overall trend of CFIUS enforcement suggests a negative impact on Chinese and Asian investors in the US real-estate market.
“Now, with the passage of FIRRMA and the strained US-China relationship, as well as tighter foreign-exchange controls by the Chinese government on Chinese enterprises investing overseas, Chinese investors may have even less interest in the potentially complex process of investing in US real estate covered by CFIUS,” he said.
Early last year, Chinese conglomerate HNA sold a Manhattan office building to a US buyer for a loss of US$41 million. The Wall Street Journal had reported in 2018 that CFIUS had informed HNA that it must divest itself of its holding in the building, which was near US President Donald Trump’s personal residence. The building had become a national security concern with Trump’s election as president. It also housed the police station that was responsible for securing Trump Tower.
The Trump Tower incident shows “the issue of real-estate proximity has become extremely important to the US and to CFIUS in the past few years”, said Cyril Brennan, a shareholder at law firm Greenberg Traurig’s international trade and customs practice.
“Chinese investments, in particular, are subject to the highest levels of scrutiny today. Most cases we have seen where CFIUS has unwound transactions after closing have occurred in the context of Chinese buyers. This tells us that CFIUS, for various political reasons, is concerned with Chinese investment,” he said. “If the buyer is Chinese, then it may make more sense to make a CFIUS filing. In other cases, if the buyer is from a country that is closely allied to the US, it may mean that it makes less sense to make a CFIUS filing.”
Sign up now and get a 10% discount (original price US$400) off the China AI Report 2020 by SCMP Research. Learn about the AI ambitions of Alibaba, Baidu & JD.com through our in-depth case studies, and explore new applications of AI across industries. The report also includes exclusive access to webinars to interact with C-level executives from leading China AI companies (via live Q&A sessions). Offer valid until 31 May 2020.
More from South China Morning Post: