Foreign Investments in US Real Estate: Issues to Consider

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.

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.

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David Kim | PARTNER

David Kim is a Partner at Parsus LLP. He specializes in corporate and technology transactions, with an emphasis on intellectual property. David has represented a variety of clients from start-ups to Fortune 500 companies in mergers and acquisitions, cross-border investment, financing, and licensing. His clients do business in a range of industries including entertainment, financial services, consumer products, gaming, software, and technology services.

Prior to returning to Parsus LLP, David served as an in-house intellectual property counsel for NBCUniversal, advising on technology and mergers and acquisitions for the various business units of the company. He assisted the company’s corporate development teams in assessing acquisition targets and negotiated NDAs, vendor service agreements, software and hardware licenses, and trial agreements for experimental and prototype technology. David was also one of the company’s primary resources on open source software-related matters.

Before joining NBCUniversal, David co-founded and served as a Partner of Parsus LLP, worked as in-house counsel for start-ups, and was an associate at Winston & Strawn, where he represented clients in intellectual property matters including patent assessment and analysis, IP licenses, and various phases of patent and copyright infringement litigation. At Winston, David also represented clients in general business and securities litigation concerning commercial disputes and business torts.

Kristen Lee
Kristen Lee
| ASSOCIATE ATTORNEY

Kristen Lee is an associate attorney at Parsus  LLP.  Her practice is focused on commercial transactions and the various day-to-day legal needs of businesses of all sizes, including business formation, corporate governance, commercial contracts, and mergers and acquisitions. Prior to joining Parsus, Kristen represented corporate clients in high-stakes litigation involving breach of contract, fraud, unfair competition, and other business torts.  

Kristen is a member of the Korean American Bar Association of Southern California.

Kristen received her B.A. degree from the University of Texas at Austin and her J.D. degree from Pepperdine School of Law.  Kristen is fluent in Korean. 

EVELYN SHIMAZAKI
| OF COUNSEL

Evelyn Aguilar Shimazaki is Of Counsel at Parsus LLP. Her practice is focused on the representation of technology companies in intellectual property licensing and commercial transactions, including joint development, manufacturing, procurement, strategic alliances, outsourcing and other services arrangements. Prior to joining Parsus LLP, Evelyn was a Senior Counsel at Apple in Cupertino, California for fourteen years. After Apple, she joined Tesla in Palo Alto, California as Chief Counsel and more recently, Oculus VR, a division of Facebook in Menlo Park, California as a Consultant.  

Evelyn is a Founding Board Member of UCLA Law Women LEAD, an Advisory Board Member of the Lowell Milkin Institute of Business Law and Policy at UCLA School of Law, and a past President and Advisory Board Member of the Philippine American Bar Association of Los Angeles.

Evelyn received her B.A. degree from the University of California, Berkeley and her J.D. degree from UCLA School of Law. A native of the Philippines, Evelyn speaks Tagalog, Spanish and some Japanese.

Ju Park
| MANAGING & FOUNDING PARTNER

Ju is a corporate lawyer by training and an entrepreneur at heart.  After attending the United States Military Academy at West Point for a year where she gained essential life skills including throwing grenades and applying a tourniquet, she graduated from McCombs Business School at the University of Texas majoring in finance.  Ju then graduated from UCLA School of Law where she focused her studies on International Business Law.  After law school, she practiced corporate law and litigation in the Los Angeles and Hong Kong offices of an international renowned law firm, Latham & Watkins, where she advised domestic and foreign clients, including Fortune 500 companies, on various corporate matters including general commercial contracts, corporate finance, IPOs and mergers and acquisitions.

Ju co-founded Parsus in 2009 with a vision to transform the legal services industry to make quality legal advice more available to and affordable for businesses of all sizes while improving the lifestyle and overall happiness of lawyers.  Over the years, and particularly since recently becoming a mother, Ju’s vision for Parsus has expanded to transform our extended community by committing a part of the firm’s profits and resources for charitable purposes.

In her role at Parsus LLP, Ju serves as outside transactional and general counsel to clients of all sizes and across a broad range of industries.  Her clients include domestic and foreign companies to whom she provides practical and cost-effective solutions to their general day-to-day business legal matters as well as major transactions such as mergers and acquisitions, corporate finance and cross-border transactions.  Ju combines her legal expertise with her business acumen to provide practical solutions to her clients’ legal issues without “over-lawyering” their contracts or deals.  Ju’s recent clients have included foreign and US companies acquiring and/or investing in US companies or assets, US companies receiving foreign and domestic investments, US subsidiaries of foreign companies going public, and foreign companies with ongoing US operations.  Ju also enjoys working with like-minded entrepreneurs and start-up executives.