SPECIAL ISSUES IN ACQUISITIONS OF U.S. REAL ESTATE BY OVERSEAS INVESTORS

As a general proposition, the United States prides itself on a policy of openness when it comes to investment in U.S. situs assets from abroad. Although purchases of portfolio investments and operating businesses can be subject to several federal and state regulatory requirements, such transactions are typically permitted, regardless of the nationality of the acquirer, absent national security, competition or other specific concerns.

However, real estate occupies a special place in the asset stack, and consequently there can be more, and more stringent, conditions and requirements around an overseas investor’s acquisition of U.S. situs real property. The principal ones are summarized below.

CFIUS

The Exon-Florio Amendment to the Defense Production Act of 1950 authorized a federal inter-departmental agency, the Committee on Foreign Investment in the United States (“CFIUS”), to review non-exempted acquisitions that the President could thereupon block or rescind on national security grounds.

Although originally interested primarily in the acquisition of operating businesses, in recent years CFIUS has seen its jurisdiction expand to cover real estate transactions where, in the Committee’s view, the subject property could be used by a foreign acquirer to gather intelligence from nearby military installations or training facilities. Further expansion of the CFIUS mandate in the real estate area is possible.

Commerce Department

The Bureau of Economic Affairs of the U.S. Department of commerce requires periodic reports of direct investments in U.S. enterprises by overseas entities. These reports must be filed in respect of most acquisitions of U.S. real estate above a certain size threshold (although non-income-producing residential real estate is generally exempt below a specific dollar threshold).

Agriculture Department

Under the Agricultural Foreign Investment Disclosure Act, overseas persons acquiring, transferring or holding interests in U.S. situs agricultural land must report the acquisitions and holdings to the Farm Service Agency of the U.S. Department of Agriculture. This requirement may apply in some cases even if the land is subsequently put to a non-agricultural use. There are some exemptions, including for properties of less than 10 acres.

Taxation

As is well known, under the Foreign Investment in Real Property Tax Act gain recognized upon most dispositions of U.S. situs real estate interests (including through domestic real property holding corporations) by overseas sellers attracts a capital gains tax, usually collected through withholding. The tax applies regardless of the use to which the property is put, which makes the treatment of such real property interests differ from the usual rules governing capital gains of non-U.S. persons (most of which are exempt from tax).

In addition, many individual states, and some municipalities, impose real estate transfer taxes of their own, many of which are independent of the nationality or domicile of the transferor.

State Provisions

The regimes described above are all under the federal jurisdiction of the United States. However, the individual states have the constitutional power to regulate the manner and circumstances of acquisitions in in-state property, so long as those regulations do not infringe federal sovereignty or the constitutional rights of persons.

There has been a recent surge in state legislation restricting overseas ownership of real estate. As of late 2023, the states with statutory or constitutional restrictions on alien ownership of real property were as follows (with proposals pending in several additional states):

The absence of specific legislative prohibitions in states not mentioned above does not preclude the possibility of regulatory or local restrictions.

Conclusion

The regulation of overseas investment in U.S. real estate is sure to remain a contentious and volatile issue. Potential investors must make a thorough review of federal and state requirements an early and important part of their pre-investment due diligence.