Foreign Investments in US Real Estate: Issues to Consider

Mar 25

Written By

With foreign Investments in the U.S. real estate market on the rise, U.S. entities involved in such cross-border transactions should be aware of certain issues when dealing with foreign counterparts. Some of the issues to consider are (1) legal requirements to “Know Your Customer”; (2) foreign regulations on export of capital; (3) Committee of Foreign Investment in the U.S. (CFIUS) review; and (4) registration requirements of the Department of Commerce’s Bureau of Economic Analysis (BEA).

1. Know Your Customer Requirements

‘Know your customer’ (KYC) refers to anti-money laundering regulations that govern the process in which U.S. lenders are obligated to identify and verify the identity of its customers. KYC requirements are compelled by a number of laws including the USA Patriot Act, the Bank Secrecy Act of 1970, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Treasury Department’s Financial Crimes Enforcement Network and the Office of Foreign Assets Control.

KYC review often require a long lead time, so parties involved in cross-border transactions involving U.S lenders and foreign entities should be prepared for potential delays that may result from the KYC review process.

2. Foreign Regulations on Capital Export

Foreign investors should consult with local counsel to become familiar with their country’s regulations on capital export. Many countries restrict the outflow of capital to foreign countries, and such regulations may interfere with successful closing of a transaction when a foreign investor is unable to deliver the funds required at closing. U.S. parties should anticipate such restrictions and consider including additional protective terms in their agreements, such as requiring proof of available capital at signing or a larger deposit, etc.

3. CFIUS Review

The Committee of Foreign Investment in the U.S. (CFIUS) is an inter-agency committee led by the Treasury Department responsible for reviewing and vetting in-bound cross-border transactions. If CFIUS determines that a transaction poses a threat to national security, it can forward the transaction to the President who can order to block the deal or to take other preventative measures to mitigate the national security risks involved. The CFIUS review process can take up to 75 days, which includes an initial 30-day review period with a potential additional 45-day investigative period. Parties involved with foreign investors of U.S. real estate, especially investors from China, should be aware of potential CFIUS filing and delays that may be posed by the review process.

4. BEA Filing

The BEA compiles statistics on the scale of foreign-owned business activities in the U.S. and the effects of these activities on the U.S. economy. In order to compile such information, BEA requires U.S. companies to report certain information when the company receives foreign investments that meet all of the following conditions: (a) the total acquisition cost is over $3mm; (b) the U.S. company will operate as a separate legal entity; and (c) the transaction will result in a foreign entity owning at least 10% of the voting interests in the U.S. company. Real estate transactions involving foreign investors should be aware of such reporting requirements unless the real estate is residential and not acquired for purposes other than profit-making.

The filing is required within 45 days of closing; and failure to comply may result in monetary fines and possible imprisonment for up to one year.