2023 Foreign Direct Investment Year End Update: Continued Expansion of FDI Regulations

As previously reported, regulations and restrictions on Foreign Direct Investment (“FDI”) have expanded quickly in the United States and in many of its trading partner countries around the world. FDI has been further complicated in the U.S. by the passage of individual State laws – often focused the acquisition of “agricultural land,” and in Europe by the passage of screening regimes by the individual Member States of the European Union (E.U.).

In 2023, fifteen U.S. States enacted some form of FDI restrictions on real estate. Some States elected to incorporate U.S. Federal regulations regarding who is prohibited from acquiring certain real estate, while other States have focused on broadly protecting agricultural lands. State laws also vary from those that prevent foreign ownership, to those that only require reporting foreign ownership.

Thus far Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin have passed laws related to FDI in real estate. 

Alabama, Arkansas, Florida, Illinois, Iowa, Kansas, Maine, Missouri, Ohio and Texas all currently require foreign investors to disclose acquisitions of certain real estate, much like the U.S. Federal Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA). Arkansas, Illinois, Maine, and Wisconsin, actually allow acquirers to fulfill their reporting requirements by simply submitting a copy of applicable federal AFIDA reports. Texas currently only limits Direct Foreign Investment in certain “critical infrastructure.”

Ohio, Pennsylvania, South Carolina, South Dakota, and Wisconsin limit foreign investment in real estate based on the number of acres; while Iowa, Minnesota, Missouri, Nebraska, North Dakota, and Oklahoma ban foreign ownership of certain land completely.

The Alabama Property Protection Act (“APPA”), which went into effect in 2023, is one of the most expansive of the U.S. State laws, and which also incorporates U.S. Federal law. The APPA restricts FDI by a “foreign principal” in real estate related to agriculture, critical infrastructure, or proximate to military installations. 

The APPA broadly covers acquiring “title” or a “controlling interest.” The APPA also broadly defines “foreign principal” as a political party and its members, a government, and any government official of China, Iran, North Korea, and Russia, as well as countries or governments that are subject to any sanction list of the U.S. Office of Foreign Assets Control (“OFAC”). The APPA defines “agricultural and forest property” as “real property used for raising, harvesting, and selling crops or for the feeding, breeding, management, raising, sale of, or the production of livestock, or for the growing and sale of timber and forest products”; and it defines covered “critical infrastructure” as a chemical manufacturing facility, refinery, electric production facility, water treatment facility, LNG terminal, telecommunications switching facility, gas processing plant, seaport, airport, aerospace and spaceport infrastructure. The APPA also covers land that is located within 10 miles of a “military installation” (of at least 10 contiguous acres) or “critical infrastructure.”  

Notably, APPA does not specifically address whether leases are considered a “controlling interest,” nor does it specify enforcement procedures. 

U.S. Federal Real Estate FDI

Businesses involved in the U.S. defense industrial base have been historically protected from FDI by the Committee on Foreign Investment in the United States (“CFIUS”). The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded those historic protections to include certain Critical Technologies, Critical Infrastructure, and Sensitive Data – collectively referred to as covered “TID.”

FIRRMA specifically expanded CFIUS to address national security concerns arising from FDI impacting critical infrastructure and sensitive government installations. Part 802 of FIRRMA established CFIUS jurisdiction and review for certain covered real estate, including real estate in proximity to specified airports, maritime ports, military installations, and other critical infrastructure. Later in 2022, Executive Order 14083 further expanded CFIUS coverage for certain agricultural related real estate. 

Covered installations are listed by name and location in appendixes to the CFIUS regulations. Early this year, CFIUS added eight additional government installations to the 100-mile “extended range” proximity coverage of Part 802. The update necessarily captured substantially more covered real estate. Unlike covered Section 1758 technologies that can trigger a mandatory CFIUS filing, CFIUS jurisdiction for covered real estate currently remains only a voluntary filing. Regardless, early diligence remains critical to any transaction in the United States that may result in foreign ownership or control of real estate.

U.S. Trading Partners FDI Regimes

The U.S. is not alone in regulating FDI, or the acquisition of real estate by foreign investors. Canada, United Kingdom and the European Union have legislative frameworks governing foreign investment in business sectors, technology, and real estate. Almost all European Union Member States have some similar form of FDI screening. 

Key U.S. trading partners that have adopted FDI regimes include, Australia, Austria, Belgium, China, Germany, France, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Poland, Singapore, Spain, and Sweden. What foreign parties, economic sectors, or technologies are covered vary from country to country. They also vary as to the notification and approval requirements. 

The UK National Security and Investment Act (NSI Act) came into effect on 4 January 2022, giving the UK government powers to intervene in transactions where assets or entities are acquired in a manner which may give rise to a national security risk. There were over 800 notifications under the NSI during the previous 12-month reporting period. In November 2023 the Deputy Prime Minister Oliver Dowden published a call for evidence on the legislation which aims to narrow and refine the scope of powers to be more 'business friendly', given that very few notified transactions have not been cleared within 30 working days. We will revisit developments on this in 2024.

The UK has continued to implement other reforms to improve transparency of foreign ownership of UK property. Part of the UK Economic Crime (Transparency and Enforcement) Act 2022 requires the register of overseas entities. The register is maintained by Companies House and requires overseas entities which own land in the UK to disclose details of their beneficial owners. Failure to comply with the new legislation will impact any registration of ownership details at the UK Land Registry (and thus the relevant legal and equitable ownership rights in any relevant property) and officers of any entity in breach will also be liable to criminal proceedings.

Recommendations

Whether a buyer or a seller, all transactions involving FDI should include an analysis of the citizenship of the interested parties, the nature of the business, land and products, and the applicability of laws and regulations that can impact the parties, timing, or transaction.

Womble Bond Dickinson’s transatlantic attorneys have experience assisting U.S., UK, and other international businesses with cross border transactions. Our attorneys can help safeguard transactions involving international trade and foreign direct investment in a variety of jurisdictions around the globe, including early diligence to identify required licenses, registrations, disclosures, and filings. We also can assist with the creation of special purpose entities to mitigate foreign ownership, control and influence (FOCI) of businesses, technology, and real estate.

About the Authors

David Vance Lucas – WBD Global Solutions Team (U.S.) 
For over three decades, David Vance Lucas has applied his legal, technological, and operational experience to craft strategic advice on intellectual property, international trade, and complex litigation matters – throughout the U.S., U.K. and Europe. He accumulated much of this experience while serving as general counsel for a global technology company and a clinical laboratory software company. David utilizes this experience and legal acumen to advise C-suites and boards of directors (public and private) on legal, compliance, and operational issues.

Andrew Tuggle – WBD Global Solutions Team (U.S.) 
Andrew is a trusted advisor to clients in many areas of international trade. He guides clients through government regulations of cybersecurity, exports, and cross-border transactions. Andrew closely monitors the regulatory environment to keep clients in compliance with international sanctions, import and export regulations, and rules about foreign direct investment. Andrew also crafts compliance programs (including training programs) that are customized to specific business operations and goals. 

Charlie Reid – WBD Global Solutions Team (UK) 
Charlie is a finance lawyer based in London. He has extensive experience advising lenders (banks, development finance institutions, funds and other alternative lenders) and borrowers in developed and emerging markets. He has advised across multiple sectors on a broad range of finance transactions including syndicated corporate lending, acquisition finance, infrastructure and other project finance, private equity and funds finance, asset-based lending, trade finance, cross-border private placements and restructurings.

This article is part of Womble Bond Dickinson’s Growing Global series. For more insights, click here to visit our Growing Global hub.