Federal government steps up probes into foreign real estate deals

The change could make investors nervous. 

A little-known federal rule change could be making it harder for foreigners to invest in Oregon’s real estate market.

In November the Trump administration took steps toward implementing the Foreign Investment Risk Review Modernization Act, broadening the scope of the committee that investigates business transactions involving foreigners. The recent policy changes make it much easier for investigators to flag foreign real estate dealings of any kind, sending a shockwave through the real estate market.

The mandate of the Committee on Foreign Investment in the United States is to protect national security, and it’s been around since 1988. The idea is to prevent foreign interests from acquiring advanced technology or other information that could be used against the U.S.

The committee has investigated an increasing number of deals every year since 2011, and the legislation makes it likely that trend will continue. Experts predict the number of reviews could jump by 20% or more as the Trump administration intends to apply the law as broadly as possible.

The number of deals that come under scrutiny each year is less than 200, but David J.  Petersen, an attorney at Tonkon Torp, says just the threat of higher regulatory hurdles could slow down the overall real estate market. “It’s a total drag on business transactions,” he says. “Most parties aren’t going to wait around for six to 12 months for an agency to review their deal.”

The lack of data on foreign real estate deals makes it unclear how the new policies will hit Oregon, but the effect could be significant. Portland has a concentrated cluster of companies in the technology and renewables space. The West Coast is a popular target for investors from China or other Asian nations.

Presidents from both parties have used the review power before. In March, President Trump blocked the acquisition of telecommunications company Qualcomm by a Singaporean company with ties to China. In 2012, the Obama administration blocked the acquisition by a Chinese company of an Eastern Oregon wind farm near a naval base. In both cases, the presidents cited national security concerns.

The escalating trade war with China and the Trump administration’s isolationist attitudes might have influenced the policy change. In many of the high-profile real estate deals involving foreign nationals, especially on the West Coast, Chinese investors are involved.

In China, land belongs to the state, and individuals can only lease it from the government for up to seven decades. Many people in China therefore see U.S. property as a more secure investment.

“Combined with the Trump administration’s general isolationist, nationalist tendency, (the act) creates a tool the administration could use to kill real estate deals by foreigners,” Petersen says.

There have been recent signs that Chinese investors are less interested in acquiring U.S. businesses. Chinese foreign direct investment into the U.S. in 2018 fell to just $4.8 billion. That’s a precipitous dive from $29 billion in 2017 and $46 billion in 2016, according to independent researcher the Rhodium Group.

The policy change gives federal investigators latitude to look at a number of new transactions, and hand down greater penalties. The old rule stated that only deals with more than 10% foreign investment could be reviewed, but now there is no threshold.

The act casts additional scrutiny on 27 technology industries, including biotechnology, manufacturing and aviation. Investors could potentially be fined an amount equal to the value of deal. For large commercial real estate transactions, that number could stretch into the millions.

Petersen advises investors to read up on the new rules. The changes have not been widely publicized, despite the serious consequences they might incur. “It’s not a well known thing,” Petersen says, “so a lot of market participants could get caught with their pants down.”

View the full article here at Oregon Business