China’s ability to buy US land near military bases just got more restricted
In early June, the US Treasury Department announced a proposed update to Committee on Foreign Investment in the United States (CFIUS) rules that would expand the committee’s jurisdiction over foreign real estate purchases. These new rules were announced after several recent high-profile and controversial planned property purchases by initially undisclosed or Chinese buyers, a growing number of state-level restrictions on foreign real estate investments, and increased congressional scrutiny on greenfield investment. These new proposed rules come on the heels of increasing concerns over Chinese investment in US real estate near sensitive locations, such as near military bases. Moreover, the proposed update could presage an expanded interpretation of CFIUS jurisdiction to include certain greenfield investments.
Passing over green fields
For the most part, CFIUS only has jurisdiction to review foreign investment in existing US businesses, often referred to as cross-border mergers and acquisitions (M&A) or brownfield investment. Its inability to review most greenfield investments, or foreign investments that establish a new business, is purposeful.
Since CFIUS’s creation in 1975 there have been calls to give it authority over greenfield investments But every time CFIUS rules have undergone legislative updates, Congress has decided to retain the Committee’s focus on M&A. This has generally reflected lawmakers’ desire to prevent CFIUS from being used as a protectionist tool or from discouraging beneficial forms of foreign direct investment (FDI). Most economists and policymakers view greenfield investment as more beneficial to economic growth than cross-border M&A.
For years, the United States has been careful to emphasize in its outreach to other countries that investment screening should apply to investment in existing businesses only. Most governments with screening mechanisms agree; among the twenty-five Organisation for Economic Co-operation and Development countries with such mechanisms in 2023, eighteen countries, or 72 percent of them, do not review greenfield investments.
A real estate exception
When Congress updated the CFIUS process in 2018 (through the Foreign Investment Risk Review Modernization Act, or FIRRMA), it retained the committee’s historical focus on M&A activity—with a few important exceptions.
The committee now has review authority over real estate transactions that grant foreign investors access to or control over land located in close proximity to sensitive sites. These sites are defined in the regulation through an appendix to the implementing rules and are comprised of key critical infrastructure installations, such as ports and some military bases.
The rationale behind this change was straightforward: The US government needed additional authorities to address any attempts by foreign adversaries to buy or otherwise gain access to prime real estate from which they could spy or launch attacks on critical infrastructure.
In September 2012, for instance, then President Barack Obama used CFIUS authorities to issue a divestment order against a Chinese company that had invested in a wind farm near a US naval base in Oregon used for weapons testing and training. CFIUS was able to intervene because the Chinese company had invested in a US business. This case helped to make these kinds of collocational risks clear to US lawmakers, but before FIRRMA, there were no federal government authorities to block the sale or lease of land to foreign nationals near sensitive government sites. FIRRMA closed that regulatory gap.
Update or sea change?
So, what does CFIUS’s June 8 proposal add? On the surface, the new proposals are less new rules and more of a technical update. The proposed rules simply add a list of about fifty sensitive sites to the real estate rules’ appendix, expanding CFIUS’s jurisdiction to any land acquisition by foreign buyers that occurs close to a listed government site. For most instillations, “close” is defined as within a mile radius; for the most sensitive sites, “close” covers a one-hundred-mile radius.
This is the second time that the list of sensitive sites has been updated. The first update was made in August 2023 after a controversial proposed greenfield investment by a Chinese firm of North Dakota farmland located about twelve miles from a military site was found to be outside the scope of CFIUS’s original jurisdiction. The newly proposed rules come shortly after the Biden administration issued an executive order in May requiring a Chinese firm to divest its holdings in a crypto mining operation in Wyoming located within a mile of Warren Air Force Base. This was the first use of CFIUS’s real estate authorities to formally block a transaction that was structured as a real estate purchase and subsequent greenfield investment.
When the new rules were announced, some immediately called for CFIUS to use these new authorities to block controversial greenfield investments, such as the Chinese-owned Gotion’s development of an electric battery plant in Michigan. However, there are two reasons to be skeptical that these new authorities could be used in such a manner.
First, the Gotion land purchase occurred prior to the proposed rule change. Typically, CFIUS regulatory changes are not applied retrospectively, though the final rule should make this explicit. If CFIUS chose to attempt to apply the rules retrospectively, it would invite a lengthy legal battle.
Second, CFIUS real estate authorities provide the committee with jurisdiction over the real estate transaction, not the nature of the business activities that are planned to occur on the site in question. That is, the national security risk review of the transaction is supposed to address risks arising from colocation only, and not create a jurisdictional hook that would allow for a more comprehensive review of broader security risks associated with the specifics of the proposed greenfield investment.
In other words, a faithful interpretation of CFIUS’s real estate rules requires that transactions only be mitigated or blocked if a risk arises from the foreign entity owning or gaining access to the land under review. Whether the land is used to make cutting-edge technology or to grow cucumbers is beside the point.
For CFIUS to stop a transaction like Gotion’s from moving forward, it would need to find that access to the investment site generated a clear national security risk. The Gotion plant is located within one hundred miles of a US National Guard base that hosts joint trainings with the Taiwanese military, but there are no clear indications that the terrain in that area facilitates useful intelligence collection of activities on that base from the Gotion facility.
Likely effects
Given the narrow, technical nature of these updates to CFIUS’s authorities, it may be tempting to conclude that these expanded real estate rules will have little effect on foreign real estate acquisitions. Indeed, as the figure below illustrates, real estate FDI in the United States is low in volume and has recently experienced substantial declines.
But these figures only track FDI in land sales. They don’t track investment associated with greenfield investment that depends on acquiring or leasing land.
Considering how restrictions on land transactions could negatively affect greenfield investment, it becomes clear how these new rules could bite. They substantially expand the US land mass that is subject to CFIUS review, especially with the expansion of the number of sites for which an “extended range” of up to one hundred miles is reviewable. (See here for an especially useful map).
In today’s geopolitical environment, it is very hard to imagine CFIUS clearing any Chinese real estate transactions that fall under its jurisdiction. Espionage risks may be low-probability, but they are also of high consequence. This, plus the fact that discovering intelligence-gathering operations is challenging by design, suggests that the US government will likely be highly risk-averse when it comes to Chinese real estate purchases in designated areas.
In other words, CFIUS real estate authorities may operate functionally as a ban on Chinese greenfield investment in any area located close to a sensitive site. If that is true, then the real question will be how the US Treasury ensures that the process for identifying covered sites remains focused on narrow national security concerns and does not become overly expansive.
Sarah Bauerle Danzman is a resident senior fellow in the GeoEconomics Center’s Economic Statecraft Initiative.
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Image: An installation sign is displayed at the main gate of Grand Forks Air Force Base, North Dakota Oct. 31, 2019. Grand Forks AFB is home to the 319th Reconnaissance Wing which provides high-altitude intelligence, surveillance, and reconnaissance to the United States Air Force. (U.S. Air Force photo by Airman 1st Class Brody Katka)