Hoteliers do not generally think of their properties as having national security implications, and in most cases, they are right. However, increased Chinese investment in U.S. properties coupled with the Trump administration’s focus on direct foreign investment in U.S. and trade relationships may mean that more hotel transactions are subject to Committee on Foreign Investment in the United States (CFIUS) scrutiny.
CFIUS reviews foreign investments and acquisitions to determine if they raise national security concerns, and typically focuses on manufacturing, finance, mining, and telecommunications sectors. However, the increased interest in real estate deals, and in particular Chinese investment in U.S. real estate, has begun to raise a few flags.
According to Forbes, Chinese investments in U.S. hotels reached $8.6 billion in 2016, up from less than $3 billion in 2015. There have been notable large transactions, including China Life Insurance’s joint venture with a sovereign-wealth fund to buy a $2 billion portfolio of limited service hotels from Starwood Capital Group, Anbang Insurance Group’s acquisition of Strategic Hotels & Resorts for $5.5 billion, and Chinese conglomerate HNA Group’s purchase of about a 25 percent stake in Hilton Worldwide Holdings. However, Chinese investment in the hospitality space has not been limited to large deals and includes acquisitions across many hotel types and tiers. For example, Waramaug LS Hotels LLC, in a joint venture with a China-based investor, recently acquired the SpringHill Suites by Marriot Newark Liberty International Airport hotel in Newark, New Jersey. Given the robust market for Chinese investment in U.S. hotels, it is in the interest of hoteliers to devote time and resources to determine if a transaction may raise the interest of CFIUS.
CFIUS is an inter-agency committee consisting of nine members, including the secretaries of commerce, defense, energy, homeland security, state, and treasury, with the secretary of labor and director of national intelligence serving as ex officio members. CFIUS review is typically voluntary, but the committee has the right to review any merger or acquisition that could result in foreign control of a U.S. business.
A CFIUS review involves an initial 30-day assessment with the potential for an additional 45-day investigation. If approved, the U.S. government cannot later challenge the transaction except in very limited circumstances. If a covered transaction is not reviewed, it is subject to later review, forced mitigation, or even potential unwinding.
CFIUS has the jurisdiction to review any “covered transaction,” which is any acquisition, merger, or takeover that could result in control of a “U.S. business” by a foreign person. Ownership of real estate is included as a U.S. business. “Control” is a broad standard meaning when any foreign person has the ability to “determine, direct, or decide” important business matters affecting an entity.
What may concern “national security” has evolved over time and will likely continue to expand. Transactions with respect to hotels in a location near what may be considered critical infrastructure, such as a port, airport, or a sensitive governmental facility such as a military base, are most likely to be in the purview of CFIUS. Although not officially reviewed by CFIUS, it was reported that San Diego’s Hotel del Coronado, close to the naval base in Coronado, was ultimately excluded from the Anbang-Strategic transaction after national security concerns were raised. The sale of the Waldorf Astoria in New York to Anbang was reviewed (and ultimately approved) in part due to the fact that many high-ranking government officials were guests or residents of the property which raised concerns over cybersecurity. Therefore, when analyzing whether a transaction may have national security considerations, reviews should be done with a comprehensive view of the property.
In addition, President Trump and a number of legislators have been vocal in their assessment that foreign investment should be viewed not only in context of direct national security interests, but through a larger view of economic security issues and that the CFIUS process is a tool for the administration to advance their national security and trade agendas. This may result in an expanded view of what types of transactions should be subject to a CFIUS review, what factors should be considered in such review, and the role of congressional or executive oversight of the process. In turn, this may result in a larger number of voluntary filings due to the uncertainty of possible changes to standards for CFIUS clearance.
For parties to hotel transactions that may be subject to CFIUS review, they should address whether the parties will submit for voluntary review, plan for the additional time and expenses necessary to complete the review, and consider contingencies if a review results in an unfavorable decision or requires mitigating conditions.
About the Author
Catherine Morgen is a partner at Morris, Manning & Martin, LLP in the Real Estate Development and Finance Practice. Morgen represents real estate clients engaged in the acquisition, development, leasing, and disposition of commercial real estate and handles large multi-state transactions, hospitality properties and office and industrial leasing.