Legislatures Nationwide Take Steps to Limit Property Ownership by Foreign Adversaries

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06.02.2023

Legislatures across the country are busy addressing numerous topics impacting individual and corporate interests from coast to coast. The Maynard Nexsen team regularly monitors legislation in all of the states where we maintain offices, as well as nationwide, to provide next level information to our clients regarding potential challenges and opportunities.

This article focuses on a common issue in multiple states, specifically focused on proposals to limit real estate ownership by persons or organizations deemed “foreign adversaries.” These bills will have varied impacts depending on the state. While some have been signed by their respective Governor, others are still at different places in the legislative process. Modifications to the federal rules from the Committee on Foreign Investment in the United States (CFIUS) have also been prompted for similar reasons.

For more information, you can reach out to the identified state contacts included with each summary or reach out to any member of the Maynard Nexsen Public Policy and Government Affairs or Real Estate teams.

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CFIUS Proposed Regulations

Contact: J. Andrew Watson 

Summary

On May 5th, 2023, the Committee on Foreign Investment in the United States (CFIUS), an agency of the United States Department of the Treasury, proposed a new rule which would further limit foreign investment in American real estate.[1]  The proposed rule would amend current regulations relating to real estate transactions pursuant to Section 721 of the Defense Production Act of 1950.[2]

History and Context

CFIUS’s newly proposed rule responds to a controversy surrounding Chinese land investment near U.S. military bases. Earlier this year, the City Council of Grand Forks, North Dakota, shot down a Chinese company’s plan to construct a $700 million corn milling plant approximately 12 miles from Grand Forks Air Force Base, which supports U.S. government air and space operations.[3]  After nearly two years of heated local debate, petitions, and calls for federal review, the City Council officially terminated the project when an assistant secretary of the Air Force declared the project “a significant threat to national security.”[4]

One impetus for the rule was CFIUS’s determination that the project was not a “covered transaction” under the committee’s jurisdiction.[5]  This determination troubled those opposed to the project.[6]  The new rule would broaden CIFUS’s jurisdiction, and place this project within their domain.

The Proposed Rule

Part 802 to Title 31 of the Code of Federal Regulations implements the provisions in Section 721 of the Defense Production Act and establishes procedures for CFIUS review of transactions involving the purchase or lease by, or concession to, a foreign person of certain real estate in the United States.[7]  Such real estate includes a group of “military installations,” listed in Part 802, Appendix A by name and location.[8] 

As defined in the existing regulations, “military installation” means any site that meets certain category descriptions, as set forth in Appendix A to Part 802.[9]  The proposed rule would amend the definition of “military installation” to add Arizona, California, North Dakota, South Dakota, and Texas to the set of states listed in paragraph (m) of Section 802.227.[10]   The proposed rule would also add eight military installation sites to Appendix A. Those sites include:

• Air Force Plant 42, located in Palmdale, California
• Dyess Air Force Base, located in Abilene, Texas
• Ellsworth Air Force Base, located in Box Elder, South Dakota
• Grand Forks Air Force Base, located in Grand Forks, North Dakota
• Iowa National Guard Joint Force Headquarters, located in Des Moines, Iowa
• Lackland Air Force Base, located in San Antonio, Texas
• Laughlin Air Force Base, located in Del Rio, Texas
• Luke Air Force Base, located in Glendale, Arizona[11]

Implications of the Proposed Rule

The implications of the proposed amendment affect both foreign parties looking to engage in real estate transactions within 100 total miles of the additional sites, as well as United States parties within the covered area seeking to sell, lease, or concede real estate to a foreign party.[12]  If CFIUS determines particular real estate is both covered by the amendment and poses a national security risk, it may suspend the transaction, require a mitigation agreement, force divestment of acquired real estate, or refer the matter to the President for further action.[13]  For this reason, parties to covered transactions and newly-covered real estate will need to consider whether they will voluntarily file notice with CFIUS or the possibility that CFIUS might self-initiate review of the property. Filings pursuant to the CFIUS real estate regulations are still voluntary, and the proposed regulation would not change the voluntary filing status. Additionally, these parties should consider similar effects on planned future transactions that may be covered.

In summary, if implemented, the proposed amendment will extend CFIUS review to six new states and eight new military installations.[14]  Ultimately, the proposed amendment is simply an expansion of existing CFIUS jurisdiction regarding foreign real estate investment surrounding certain military bases.[15] 

Alabama

Contact: Raymond Bell 

On May 18, 2023 the Alabama Senate passed a revised version of House Bill 379 also known as the Alabama Property Protection Act. The original bill would have made it unlawful for a Chinese citizen, a governmental entity of China, any company headquartered in China or held or controlled by the government of China or which has a majority of ownership held by citizens of China to purchase property in Alabama. The revised bill removes the language focused on “China” and now prohibits individuals domiciled in certain foreign countries, certain foreign governments, or governmental entities, and any person, country, or government identified on a sanctions list by the Office of Federal Foreign Assets Control from acquiring certain types of property or property within ten miles of any military installation or critical infrastructure facility.

Consistent with the earlier version if enacted the legislation will not have any impact on title to any current real property interests and provides liability exemptions for title insurers, agents and settlement providers for violations related to any impermissible property transactions. Additionally, the legislation will not apply to any existing businesses or the expansion of any existing business on contiguous property.

The bill was signed by Governor Ivey on May 31st. 

Florida

Contact: Paul Dietrich

On May 8, 2023, Governor DeSantis signed into law Senate Bill 264 “Interests of Foreign Countries,” which created the “Conveyances to Foreign Entities Act,”, and is set to take effect July 1, 2023. Among other things, this law sets forth restrictions and regulations regarding the interests of “Foreign Principals” at it pertains to certain Florida real estate.

What is a Foreign Principal?

A Foreign Principal is considered any of the following:

1. The government or any official of the government of a foreign country of concern;
2. A political party or member of a political party or any subdivision of a political party in a foreign country of concern;
3. A partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country of concern, or a subsidiary of such entity;
4. Any person who is domiciled in a foreign country of concern and is not a citizen or lawful permanent resident of the United States; or
5. Any person, entity, or collection of persons or entities, described in paragraphs (a) through (d) having a controlling interest in a partnership, association, corporation, organization, trust, or any other legal entity or subsidiary formed for the purpose of owning real property in this state.

Foreign countries of concern include:

• People’s Republic of China;
• Russian Federation;
• Islamic Republic of Iran;
• Democratic People’s Republic of Korea;
• Republic of Cuba;
• Venezuelan regime of Nicolas Maduro;
• Syrian Arab Republic; and
• Any agency or other entity over which any of the foregoing maintain significant control.

A Foreign Principal may not own, except in limited circumstances:

• Agricultural lands (means land classified as agricultural under F.S. 193.461); or
• Real property on or within 10 miles of any military installation or critical infrastructure facility (both defined in SB 264).

“Critical infrastructure facility” includes a chemical manufacturing facility; a refinery; an electrical power plant; a water or wastewater treatment plant; a liquid natural gas terminal; a telecommunications central switching office; a gas processing plant; a seaport; a spaceport territory; an airport.

There is an exemption for ownership or registration as to either agricultural lands or real property on or within 10 miles of any military installation or critical infrastructure facility if that the ownership interest is indirect and de minimus, as described in the statute.

Existing Foreign Principal interests

A Foreign Principal who owns (or takes ownership) of such property before July 1, 2023, may continue to own that land but must register with the applicable department. Agricultural lands require registration with the Department of Agriculture and Consumer Services (DACS) by January 1, 2024. Property on or within 10 miles of a military installation or a critical infrastructure facility requires registration with the Department of Economic Opportunity (DEO) by December 31, 2023. SB 264 directs DACS and DEO to establish forms for such registration and rules to implement their respective sections of the law.

Residential Exception

A Foreign Principal who is a natural person may purchase one residential property up to 2 acres in size that is not on or within 5 miles of any military installation in the State, provided the Foreign Principal takes title and is authorized to be in the United States and in the State of Florida with official documentation (e.g., visa). In this situation, the Foreign Principal must register such ownership with the appropriate agency within 30 days.

Transactional Requirements

In all purchase transactions, the buyer must complete an affidavit attesting that such buyer is not a Foreign Principal or a Foreign Principal prohibited from purchasing and is otherwise in compliance with the applicable section of this new law.

• Failure to obtain the affidavit does not affect the title or insurability of the title to the property.
• Provided the closing agent does not have actual knowledge that the transaction will result in a violation of the law, failure to obtain or maintain the affidavit does not subject them to civil or criminal liability.
• The Florida Real Estate Commission (FREC) is responsible for adopting the form affidavit required by the law.

Foreign Principals who become owners of an interest in the proscribed Florida property after July 1, 2023, as a result of devise, descent, enforcement of security interest or collection of debts must divest themselves within 3 years.

Penalties

Failure to register as described in the law or to own or acquire real property in violation of the law may result in daily penalties, lis pendens, a possible ex-parte seizure order and forfeiture, with forfeiture subject to the rights of bona fide lienholders. The Act provides that the forfeiture of the real property acquired or retained in violation of Act by the State of Florida would vest title in the State, subject to any bona fide liens (including a mortgage).

Additionally, there are potential criminal repercussions for both ownership in violation of the law, as well as criminal liability for any person to knowingly sell real property in violation of SB 264

Doubling Down on China

In addition to the above, there comes more stringent rules concerning ownership of real property by individuals and entities affiliated or associated with the People’s Republic of China.

• Ownership of any type of property is not permitted; however, there is a carve-out for one residential parcel of 2 acres or less that is not on or within 5 miles of a military installation and the person has the appropriate documentation for legal presence in the State.
• All persons under this section of the law must register with the Department of Economic Opportunity if they have an ownership interest in any real property in Florida unless such interest is an indirect de minimus interest as defined under the law.

North Carolina

Contact: David Ferrell 

In North Carolina, House Bill 463, “NC Farmland and Military Protection Act”, was introduced to prohibit adversarial foreign governments from acquiring certain lands within North Carolina. Specifically, this bill prohibits such governments from purchasing, leasing, or holding an interest in agricultural land or land situated within a 25-mile radius of a military base, military installation, or military airport. The bill defines an adversarial foreign government as either a state-controlled enterprise in which a foreign government possesses more than 50% of the ownership interest or the government of a foreign nation that has received a designation under 15 C.F.R. § 7.4 for engaging in a long-term pattern or serious instances of conduct significantly adverse to US national security or the security and safety of US persons. The bill also includes definitions for agricultural land and interest. This bill would apply to interests in land acquired on or after January 1, 2024

At the request of the real estate industry, a provision was added in the House to provide that the responsibility for determining whether an individual or other entity is subject to bill rests solely with the adversarial foreign government and the State of North Carolina and no other individual or entity. Further, a provision was added to provide that an individual or other entity who is not an adversarial foreign government shall bear no civil or criminal liability for failing to determine or make inquiry of whether an individual or other entity is an adversarial foreign government.

On April 26, 2023, the bill passed the House, was sent to the Senate and referred to the Senate Rules Committee.

As originally introduced, the bill provides that any land transfer that violates this statute will be “void.” Several North Carolina real estate related groups, including the North Carolina Land Title Association and the Real Property Section of the North Carolina Bar Association, are working with the bill sponsors and other interested parties to draft a substitute procedure to replace the “void” result – to provide a process to address how the divesture or surrender of property would work, how lenders, lien holders, and other parties will be protected, and other similar matters. The bill has not yet been scheduled for hearing in the Senate.

South Carolina

Contact: Bob Coble and Mark Harmon

S.576, the Alien Land Ownership Bill introduced by Senator Shane Massey (R-Edgefield), was passed by the South Carolina Senate on March 23, 2023. The bill would prohibit a citizen of a foreign adversary or a corporation controlled by a foreign adversary from acquiring any interest in real property in South Carolina. The intent of the legislation would extend the prohibition to Chinese citizens and corporations. The Senate amended the bill from the original version to provide for exceptions for dual citizens, and provided grandfathering clauses for existing ownership and expansions under terms approved by the South Carolina Secretary of Commerce and Governor.

The definition of a "corporation controlled by a foreign adversary" means a legal entity engaged in commerce that is wholly owned by a foreign adversary, has a foreign adversary as a dominant shareholder, directly or indirectly, is wholly owned by a citizen of a foreign adversary, or has one or a number of citizens of a foreign adversary whose cumulative ownership is as a dominant shareholder. "Dominant shareholder" is further defined as the single owner of ten percent or more of a legal entity engaged in commerce's stock, securities, or other indicia of ownership or multiple owners of twenty percent or more of a legal entity engaged in commerce's stock, securities, or other indicia of ownership. As prescribed in the bill, the status of “foreign adversary” would be based upon determinations made by the United States Secretary of Commerce.

After Senate approval, S.576 was sent to the South Carolina House and referred to the Ways & Means Committee. The South Carolina Legislature adjourned Sine Die on May 11, 2023. Governor McMaster called the Legislature back into Session starting May 16 to complete the 2023 Budget and to finalize a number of other bills. The Legislature should adjourn for the year by the end of May 2023. With the General Assembly having returned for special session, S.576 is in order for consideration, but it is unlikely to be taken up until the Legislature returns in 2024.   

Tennessee 

Contact: Elizabeth Holland

House Bill 0040 was signed by Tennessee Governor Bill Lee on May 11, 2023  and prohibits a nonresident alien, defined in the bill as a person who is not a citizen of the United States or who has not been lawfully admitted into the United States for permanent residence, a foreign business or foreign government; or an agent, trustee, or fiduciary thereof from purchasing or otherwise acquiring real property in this state, including easements, water rights, agricultural land, or any other interest in real property, if the laws of the country where the nonresident alien resides, the foreign business is located, or the official foreign government representing the country, or agents, trustees, or fiduciaries thereof, prohibit citizens of the United States or its territories or possessions from purchasing real property located within that country.

This bill defines a foreign business as a corporation incorporated under the laws of a foreign country or a business entity whether or not incorporated, in which a majority interest is owned directly or indirectly by nonresident aliens. As used in this bill, the determination of owned, in terms of ownership or control of foreign business, is not affected by legal entities, including, but not limited to, trusts, holding companies, multiple corporations, and other business arrangements.

The restriction created under this bill does not apply to the following:

(1) Real property acquired by devise or descent;

(2) A bona fide encumbrance on real property taken for purposes of security; and

(3) Real property acquired by a process of law in the collection of debts; or by a deed in lieu of foreclosure, pursuant to a forfeiture of a contract for deed; or by a procedure for the enforcement of a lien or claim on the real property, whether created by mortgage or otherwise. However, real property so acquired must be sold or otherwise disposed of within two years after title is transferred. Pending the sale or disposition, the real property must not be used for a purpose other than what it was used for immediately prior to the time the property was put up for sale, and the property must not be used except under lease to an individual, trust, corporation, partnership, or other business entity not subject to the restrictions mentioned above.

This bill further clarifies that a nonresident alien, foreign business, or foreign government, or an agent, trustee, or fiduciary thereof, who holds real property in this state on July 1, 2023, may continue to own or hold the property, but is prohibited from the following:

• Purchasing or acquiring additional real property in this state on or after July 1, 2023; and
• Transferring the title to or interest in the real property to another nonresident alien, foreign business, or foreign government, or an agent, trustee, or a fiduciary thereof, except by devise or descent. In such a case, the alien, business, or government, or an agent, trustee, or a fiduciary thereof, must divest itself of all right, title, and interest in the real property within two years from the date of acquiring the real property or interest. However, this divestment requirement does not apply to an acquired interest through devise or descent in real property by a nonresident alien made prior to July 1, 2023.

After July 1, 2023, a person, business, or other entity who purchases or otherwise acquires real property in this state, except by devise or descent, and whose status changes so that it becomes a nonresident alien, foreign business, or foreign government, or an agent, trustee, or fiduciary thereof, must divest itself of all right, title, and interest in the real property within two years form the date that its status changed.

A nonresident alien, foreign business, or foreign government, or an agent, trustee, or fiduciary thereof, who owns an interest in real property in this state on or after July 1, 2023, must register the real property with the secretary of state within 60 days after July 1, 2023, or within 60 days after acquiring the real property or the interest in real property, whichever is later. The registration is required to be in the form and manner prescribed by the secretary of state and contain certain identifying information.

This bill provides that if the secretary of state finds that a nonresident alien, foreign business, foreign government, or an agent, trustee, or other fiduciary thereof, has acquired or holds title to or interest in real property in this state in violation of this bill, then the secretary of state must report the violation to the attorney general and reporter. Upon the receipt of the report, the attorney general and reporter must initiate an action in the circuit court of any county in which the real property is located and will file a notice of the pendency of an action initiated with the recorder of deeds of the appropriate county or counties.

If the court finds that the real property in question has been acquired or held in violation of this bill, then the court must enter an order so declaring and file a copy of the order with the recorder of deeds of each county in which any portion of the property is located. In addition, the court should declare the real property escheated to the state and order the sale of the real property in the manner provided by law for a mortgage foreclosure. The proceeds of the sale must be used to pay court costs and the remaining funds must be paid to the person divested of the property.

This bill further provides that if the secretary of state finds that a nonresident alien, foreign business, foreign government, or an agent, trustee, or other fiduciary thereof, violated this bill by failing to timely register as required, the secretary must assess a civil penalty that should not exceed $2,000 for each violation.

Texas 

Contact: Taylor Meek

Background:  Texas Senate Bill 147 (“SB 147”), titled "An Act relating to the purchase of or acquisition of title to real property by certain aliens or foreign entities," was introduced and sponsored by Senator Lois Kolkhorst in November 2022.  The introduction of SB 147 follows the 2021 passage of Texas Senate Bill 2116, a bill designed to protect critical infrastructure in Texas by prohibiting contracts or agreements regarding critical infrastructure with Russia, North Korea, China, and Iran due to concerns regarding national security.

The original text of SB 147 established a blanket prohibition on the acquisition of any real property in Texas by entities or individuals from Russia, North Korea, China, and Iran.  However, SB 147, as amended, has been watered down and further clarified, as discussed below.  Upon SB 147’s passage in the Texas Senate, Senator Kolkhorst remarked that “SB 147 has been limited to particular types of land that are of national security interest: agriculture land, minerals in place, mines and quarries, or standing timber.”

Update:  SB 147, as amended, was passed by the Texas Senate on April 26, 2023.  SB 147 is currently in front of a Texas House State Affairs Committee. With the legislature adjourning its biennial session on May 29, it is unlikely that the bill will receive final passage from the House. 

Summary of SB 147, as amended:  SB 147 amends Chapter 5 of the Texas Property Code by introducing a prohibition on the purchase or acquisition of title to specific types of real property by certain foreign (those from “Designated Countries”, presently China, Russia, Iran, and North Korea) entities and individuals in Texas.

SB 147 defines “real property” as agricultural land, improvements located on agricultural land, mines or quarries, minerals in place, and standing timber, and defines “agricultural land” as land located in Texas suitable for the production of plants and fruits for human or animal consumption, plants grown for fiber, floriculture, viticulture, horticulture, planting seed, or the keeping of domestic or native farm or ranch animals for use or profit. 

SB 147 provides that the following may not purchase or otherwise acquire title to the foregoing-described real property in Texas: (1)  a governmental entity of a designated country;  (2)  a company or other entity that is:  (A)  headquartered in a designated country; (B)  directly or indirectly under the control of the government of a designated country; or (C)  owned by or under the control of one or more individuals who are citizens of a designated country; (3)  a company or other entity that is owned by or under the control of a company or entity described by Subdivision (2); or (4)  an individual who is a citizen of a designated country.

SB 147 defines “control” as ownership of at least 50 percent of the voting ownership interest necessary to elect a governing person or authority of an organization.  SB 147 defines "Designated Country" as a country identified by the United States Director of National Intelligence as posing a risk to the national security of the United States in the three most recent Annual Threat Assessments of the U.S. Intelligence Community, as issued pursuant to Section 108B, National Security Act of 1947 (50 U.S.C. Section 3043b).  Currently, the only countries that meet this definition are China, Iran, North Korea, and Russia.  These are the same countries that were explicitly identified in the initial text of the bill, however, the amended version allows for countries to fall within, or outside of, SB 147’s definition of Designated Country, and leaves such determination up to the US Director of National Intelligence.

Another important change from the initial version of the bill is that SB 147 now provides exceptions to the prohibition outlined above. Specifically, the prohibition on acquiring real property does not apply to 1) individuals who are citizens or lawful permanent residents of the United States, including those who are citizens of a foreign country (this also extends to companies or entities owned or controlled by such individuals), 2) real property that qualifies as an individual's residence homestead (as defined by Section 11.13(j) of the Texas Tax Code), and 3) to leasehold interests in land or improvements constructed upon a leasehold.

If enacted, SB 147 grants enforcement powers to the Texas attorney general.  If the attorney general reasonably suspects that the purchase or acquisition of title to real property in violation of the new law (if enacted) poses a risk to public health, safety, and welfare, the attorney general may bring an action to enforce the new law (if enacted) in a district court located in the county where the subject property is situated.  SB 147 also authorizes the attorney general to conduct discovery through the Texas Secretary of State via service of interrogatories, and authorizes the Texas Secretary of State to provide to the attorney general “all records held by the secretary relating to the ownership or control of a company or other entity” that is subject to the enforcement action. 

Ultimately, SB 147 provides that if the district court does find that the real property was purchased or otherwise acquired by an individual or entity in violation of SB 147 (if enacted into law), then the district court shall enter an order divesting the individual’s or entity’s interest in the real property and providing for the appointment of a receiver to “manage and control the real property pending the sale or other disposition of the real property”. 

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^{[1] Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 88 Fed. Reg. 29,003, 29,005 (May 05, 2023) (to be codified at 31 C.F.R. § 802).
[2] Id.
[3] A timeline of the much-debated Fufeng project, Grand Forks Herald, (Feb. 6, 2023), click here; Mitch Smith, A North Dakota City Attracted a Corn Mill. Then Came Question About Its Chinese Owners, N.Y. Times (July 17, 2022), click here; Joel Crane, Fufeng corn milling plant project to be terminated; Air Force cites national security concerns, KFYR TV, (Jan. 31, 2023)
[4] Smith, supra note 3.
[5] See Meghan Arbegast, et al., Path opens for Fufeng project after federal agencies determine land deal was ‘not covered’ by CFIUS, Grand Forks Herald, (Dec. 13, 2022)
[6] Id.
[7] Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 88 Fed. Reg. 29,003, 29,005 (May 05, 2023) (to be codified at 31 C.F.R. 802); 31 C.F.R. § 802.101(a).
[8] 31 C.F.R. Part 802 app. § A.
[9] 31 C.F.R. § 802.227.
[10] Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 88 Fed. Reg. 29,003, 29,005 (May 05, 2023) (to be codified at 31 C.F.R. § 802).
[11] Id.
[12] 50 U.S.C. § 4565(a)(4)(B)(ii).
[13] 50 U.S.C. § 4565(l).
[14] Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 88 Fed. Reg. 29,003, 29,005 (May 05, 2023) (to be codified at 31 C.F.R. § 802); 31 C.F.R. § 802.101(a).
[15] See 31 C.F.R. § 802.101(a).}