Despite a growing appetite for investment as the U.S. economy recovers from the pandemic, the regulatory process governing the entry of foreign investment capital into the U.S. is intensifying.
Many readers of this publication are undoubtedly familiar with U.S. foreign investment reviews under the Committee on Foreign Investment in the United States (CFIUS). While this process was based on a national-security review of acquisitions of controlling interests in U.S. companies, and filings were voluntary, recent amendments via the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) have broadened CFIUS’ reach. It now includes mandatory filings even for certain noncontrolling investments, including data-collecting companies and in specified real estate. Further, as part of a strong government trend addressing the security of U.S. communications and data, the Federal Communications Commission (FCC) and the U.S. Department of Commerce (“Commerce”) have instituted new, and potentially lengthy, review processes to safeguard those interests. Collectively, these efforts represent a “whole-of-government” approach to limit potential adversaries’ access to U.S. technology and information.
CFIUS Review of Foreign Real Estate Investment
Before FIRRMA, even controlling investments by foreign entities in “greenfield” (undeveloped) real estate projects were seldom subject to review. Under the regulations effective February 13, 2020, however, foreign investment in certain specifically identified real estate – even if noncontrolling – became subject to review.
Such CFIUS jurisdiction applies if the purchased interest, lease or concession:
- Provides certain indicia of ownership (i.e., rights to access, to exclude others from the property and to build improvements); and
- Extends to real estate in varying specified proximities to national security installations and ranges as specifically enumerated in 31 C.F.R. §§ 802.101-105, or within (or as part of) identified air and maritime ports.
Some of these jurisdictional distances extend as far as 100 miles or to entire rural counties, so review of the tables in Part A is necessary.
Given the substantial penalties imposed by CFIUS for failure to file, should it later determine that such filing was in order, it is clearly the better course to make a voluntary filing. This can be either a short-form Declaration, which is answered within 30 days, or a full Notice. Ultimate disposition of the latter can take 45 days or up to 115 days in the case of an appeal. Note that there is no “presumption of denial”; the majority of CFIUS-reviewed transactions are ultimately approved.
There are exceptions to this review process:
- It is not applicable to mere extensions of financing.
- It is not applicable to “Excepted States” – currently Canada, Australia and the United Kingdom – provided that the investor is resident in the excepted state, has demonstrable personal or corporate ties to the domicile, and is no more than 10% owned by any investor from a non-excepted state.
- Section 802 expressly excludes most urban areas or existing office/commercial developments, as well as certain Native American Tribal lands.
Recommendation Regarding Covered Real Estate Investments
In most instances of possible CFIUS jurisdiction, we would advise filing at least the short form (five-page) “Declaration” for any potential “covered transaction” as a precautionary measure. With no filing fee, the cost is negligible and provides an answer as to whether the transaction is cleared, or requires further filings and review, within 30 days.
FCC Foreign License Review
With the release of the FCC Report and Order on November 27, 2020, a new review process for license applications involving foreign ownership was established, including referral to the Executive Agencies in certain cases. However, unless a tower investor is also seeking to operate (or be a party in the operation) of an FCC-licensable service (such as a Section 214 authorization), it is unlikely to be concerned with this extraordinary review.
Information and Communications Technology and Services Rule and Supply Chain Risk
Another source of potential risk for the foreign U.S. tower investor is even more recent. On March 22, 2021, the Biden administration allowed the formal rule under Trump Executive Order 13873 (May 15, 2019) to take effect. This came after a lengthy process of notice and comment on the interim final rule, empowering the Bureau of Industry and Security, to block or modify certain covered transactions involving information and communications technology and services (ICTS) originating in countries labeled as “foreign adversaries” if the transaction is seen on review as posing a risk to U.S. national security. 15 C.F.R. § 7 (2021). The named adversaries are China, Russia, Iran, Cuba, North Korea and members of the Maduro regime in Venezuela.
“Covered transactions” under the rule involve persons subject to – or property within – the jurisdiction of the U.S., and regarding which any foreign country or national has an interest – or an interest in a contract – to provide one or more of a specific list of technologies or services.
The full list can be found at 15 C.F.R. § 7 (2021). For the purposes of this article, the most relevant are:
- A transaction involving “critical infrastructure” as designated under Presidential Policy Directive 21, which expressly encompasses “telecommunications infrastructure”; and
- “Software, hardware, or any other product or service integral to wireless local area networks, mobile networks, satellite payloads, satellite operations and control, cable access points, wireline access points, core networking systems, or long- and short-haul systems” (emphases added).
It should be noted that Commerce’s review under this rule is preempted by a completed or pending CFIUS review of an investment that includes the covered transaction.
Assuming that the prospective tower investor does not itself originate from, nor is owned or controlled by, an entity subject to one of the listed “foreign adversaries” – a matter that would most likely have attracted CFIUS interest first – what risk is presented by this rule? That depends on the answers to two questions not fully clear from the rule:
- Is a tower “critical infrastructure” within the rule?
While not specifically mentioned, by any reasonable interpretation, it would seem to be included in “telecommunications
infrastructure” under Presidential Policy Directive 21. In any case, prudent risk management would dictate that we assume its inclusion. - What potential liability attaches to a tower lessor for its lessee’s possible failure to abide by the review requirements?
Alternatively, for what level of diligence (and/or reporting responsibility) might a tower owner be held regarding its lessee’s – or lessee’s vendors/partners – supply chain under the rule? The rule itself is unclear on this, among other things, and the absence of public regulatory actions so far under the new rule offers little guidance. After review, Commerce’s express powers under the rule extend to modifying or blocking a “transaction.” While likely intended to apply to an importation or sale, such an action might well cause the tower investor/lessor economic harm by unraveling the lessee’s supply and service arrangements, undermining its ability to enter or maintain the lease on the agreed terms, and leaving the investor at least temporarily without the negotiated stream of revenue.
Moreover, if the tower owner is also a partner in the ownership, management or operation of the lessee’s service business, its responsibility under the rule is clearer and its potential risk proportionately higher.
Another consideration: if Commerce makes an initial determination, parties have 30 days to appeal for modification of the decision; however, the ensuing “final review” process may take as long as 180 days under the rule. Such delays may tend to have an adverse effect on financing arrangements.
Recommended Investor Actions
As the tower investor’s potential exposure under the ICTS rule remains somewhat unresolved, we recommend that until regulations under the rule are more developed, prudent foreign investors in U.S. tower properties should:
- Review their own investment sources, ownership and supply chain for (1) possible CFIUS filing requirements and (2) sufficient diligence to attest to Commerce, if necessary, regarding compliance with any review requirements under the ICTS rule; and
- Include in all transaction documents, including lease agreements, specific language in the Representations & Warranties that:
- The counterparty is aware of the ICTS provisions, and that it is fully compliant with its provisions and review requirements (if applicable); and
- The counterparty warrants and agrees that it will in turn contractually require this of its own partners, investors, sublessees, service providers, vendors and suppliers in services using the property.
As the law continues to develop in this area and under the new rule, Phillips Lytle’s Telecommunications Team will continue to closely monitor developments and rulings, as well as relevant pending legislation in Congress, and work with prospective foreign investors on sound approaches to mitigate risk and meet these challenges.
James Kevin Wholey is an attorney at Phillips Lytle LLP, where he focuses on the legislative, policy and compliance issues involved in international investment, trade and business development. He can be reached at jwholey@phillipslytle.com or (202) 617-2714.
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