Legal Patchwork On Foreign Land Ownership Stirs Confusion

By Charlie Innis-law360.com

The deeds caught the attention of County Commissioner Van Shaver, who wrote on his website in August 2023 that the buyers appeared to be from "Hong Kong/China."

"Before somebody screams racism, my concern here has nothing to do with race but everything to do with Communist China, a country that wants to destroy America, getting a toehold in Loudon County," Shaver wrote.

The land sales alarmed state lawmaker Rep. Lowell Russell, R-Vonore, who told Law360 in an email that he and his colleagues are working on a bill that would prohibit foreign parties from buying agricultural land in Tennessee.

Local Concerns, National Perspective

In Tennessee, at a Loudon County Commission workshop meeting less than a week after the GAO put out its report, local officials weren't shy about expressing their concerns over noncitizens owning agricultural land in their community.

A vice president of Walton Global, Anthony Sparrow, explained to a packed room of residents and county officials at the meeting on Jan. 22 that the 400 acres his company bought is part of the firm's business of buying land for future housing developments and selling interest in the property to foreign investors. 

The investors, Sparrow said, include residents of China, Hong Kong and Taiwan, and the deal's covenants and restrictions prevent U.S. citizens from owning interest in the properties because the deal is structured as a foreign investment, he said.

Shaver, the county commissioner, told Sparrow at the meeting that people across the country are concerned about noncitizens buying land in the U.S.

"I understand they didn't purchase your land, they just invest in your land, but I know I, these people, we all have concerns," he said. "I think it would be the same if it had been from Saudi Arabia, if it had been from Japan, if it had been from Mexico."

Shaver said in an interview with Law360 that while Sparrow did an outstanding job answering questions at the meeting in "what could be considered nothing less than a very hostile environment," his responses didn't make anybody feel more comfortable with the investors. 

"I think everybody can agree that China is probably not a friend to the United States," he said.

He said he understands why the company took interest in Loudon County's Hotchkiss Valley. The land is directly adjacent to a major highway that connects to the nearby city of Knoxville.

"They would like to have the property rezoned for high-dense development. That's never going to happen," Shaver said.

He added that even if there were no foreign investors involved, he thinks the community would still be concerned about the possibility of clustered housing developments popping up in the county.

A representative for Walton didn't respond to requests for further comment.

The controversy over the 400-acre purchase is just a sample of the debates playing out across the nation.

Politicians from 39 states have taken action in response to such national security concerns in the last year and a half, introducing or enacting legislation aimed at curbing certain foreign entities and people from owning various forms of real estate.

Definitions of who faces restrictions within the legislation varies by state, with some bills referring to entities from countries named on federal agencies' watch lists, while others place prohibitions on Chinese investors specifically.

A few bills seem ambiguous and prohibit ownership of any amount of interest on all real estate, while some target only agricultural property and others allow for ownership of a noncontrolling interest.

Some lawyers say the patchwork of new legislation has created a quagmire of confusion, chaos and uncertainty for investors, particularly private equity funds with large pools of backers.

"This is just making it really darn difficult to do business in Tennessee, especially as business is done today," said N. Courtney Hollins, a Nashville-based shareholder with Baker Donelson Bearman Caldwell & Berkowitz PC.

Limits of Federal Law

Concern over the national security and economic implications of people and companies from certain countries owning U.S. land, particularly agricultural land, is old news. Foreign investment has traditionally been reviewed at the federal level, by the Committee on Foreign Investment in the United States.

But the uptick of individual states enacting laws restricting foreign ownership is new, said Michael T. Gershberg, a partner in Fried Frank Harris Shriver & Jacobson LLP's international trade and investment practice group.

"There's been a sense in some states that federal law has been insufficient to address the situation," Gershberg said.

Fifteen states have enacted some sort of prohibition on foreign people or entities acquiring land within their borders, according to an analysis of legislation conducted by Law360.

Some states, such as Alabama and Idaho, have banned foreign governments and foreign state-controlled businesses from buying property. Other states, like Florida and South Dakota, went even further. Florida bars people who live in China and aren't U.S. citizens from acquiring land. South Dakota restricts people from China, Iran, North Korea, Russia, Cuba and Venezuela from owning agricultural land.

More states have seen lawmakers introduce similar bills since last summer, including Hawaii, where a proposed law banning foreigners from owning real estate received support from a large swath of residents who saw it as a chance to help local residents compete in the housing market. The bill also faced criticism from some state officials, who questioned the legislation's legality.

Some bills failed to pass through committees last year, including in Texas, Missouri and Arizona, but Arizona is now considering a similar measure in its 2024 legislative session.

David Kaye, a real estate investments partner at Ropes & Gray LLP, said his law firm has been keeping tabs on the various bills across the country and maintains an over 50-page chart tracking the statutes.

The legislation falls roughly into three categories, he said. There are bills that primarily focus on agricultural land and property in close proximity to critical infrastructure, such as military bases and airports.

A second category includes broad statutes that restrict noncitizens from acquiring a title to a property or from owning land directly or indirectly.

Then the third category consists of statutes that are drafted unambiguously, with clear-cut carveouts for private equity that are easy to parse.

"I'd say the majority of them are probably drafted in a way that's not totally clear," Kaye said.

In December, 16 Republican governors sent a joint letter to the Biden administration calling on the federal government to address what they described as the "imminent national security threat" of the Chinese Communist Party "acquiring swaths of real property throughout the United States."

CFIUS is falling short in its duties to review deals involving foreign investors, the letter said.

The governors wrote that CFIUS "unfortunately" didn't review a property deal last year that saw Gotion High-Tech Co. Ltd., a Chinese battery company, buy 270 acres in Michigan. They described the transaction as "plainly alarming."

Gotion is headquartered in China and has locations in California's Silicon Valley and in Ohio, in addition to Japan, Germany and Singapore. The company has operated in the U.S. since at least 2014, according to its website, and it announced plans in September to open a $2 billion factory in Illinois.

CFIUS, which is run by the U.S. Department of the Treasury, isn't free to pore over every real estate deal involving a foreign business.

The committee is only authorized to review certain inbound real estate transactions for national security implications when the property is within a certain distance from a military site or other governmental facility. The Treasury Department expanded the scope of sites that fall under that category last year, and the list of U.S. Army installations, airports and maritime ports covered under CFIUS jurisdiction is published online.

In most cases, the CFIUS review process for deals is voluntary, said Brian Egan, a national security partner at Skadden Arps Slate Meagher & Flom LLP. But the committee has the power to unwind a deal it deems problematic, so a company can safeguard itself from that possibility by obtaining clearance from CFIUS ahead of time.

"The reason that you might do that, in most cases, is you're worried that there may be a national security hook, and you want to get kind of a safe harbor from CFIUS coming after you after the fact to review a transaction and screw things up," Egan said.

CFIUS may also learn about a possibly problematic real estate deal from other sources, such as by reading the press, security filings, industry newsletters and from internal intelligence within the U.S. government. But a transaction that is purely real estate and doesn't involve a U.S. operating company is less likely to be on the committee's radar.

"You may not have a reason to read a report in Forbes about somebody who bought some farmland in Kansas or what have you," Egan said.

As for deals that involve private equity funds with complex structures, if the entity isn't controlled by foreign investors, such transactions may not be subject to CFIUS jurisdiction, he said.

For example, if an investment vehicle behind a property purchase is made up of 80% U.S. citizens and 20% noncitizens, then CFIUS likely wouldn't see a need for additional scrutiny, especially if the real estate isn't close to a sensitive facility.

Strict Oversight in Florida

Lawmakers across several states appear to be trying to fill what they see as gaps in CFIUS' power to review real estate deals.

The most widely known law of this kind is Florida's S.B. 264, which prohibits people "domiciled in China" from acquiring any interest in real estate in the state. The law also restricts any person who is "domiciled in a foreign country of concern" — including people who permanently live in Russia or Iran — from owning or buying agricultural land, and from possessing any interest in property within 10 miles of a military installation or critical infrastructure.

The broadness of Florida's statute creates challenges for attorneys working with asset management clients, Ropes & Gray partner Eric Requenez said.

"It doesn't contemplate some of the complicated funding structures that are out there, where you might have distribution arrangements with third parties, where the fund manager doesn't even know who the underlying beneficial owners are," he said.

Something else Requenez's asset management and private fund clients grapple with is the cost of complying with the law.

"Not only do you need to be monitoring for your typical compliance obligations, but now you're having to take a look at, effectively, blue sky laws, and see what the laws are in each state with respect to any prohibitions on the underlying investors that are allowed to have indirect ownerships," Requenez said.

A group of Chinese citizens sued Florida to block enforcement of the law, and the case recently rose up to the Eleventh Circuit, which partially granted a preliminary injunction in their favor in February. The panel of judges who made the ruling said the Chinese citizens have shown "a substantial likelihood of success" on their claim that federal law giving CFIUS the power to scrutinize real estate transactions for national security implications preempts S.B. 264.

The impact of that ruling is likely limited, as the case still awaits a decision on the merits from a separate panel for the Eleventh Circuit.

Florida lawmakers, meanwhile, introduced a separate bill, S.B. 814, this year that aimed to clarify certain parts of the controversial law, but the state House passed a version of that legislation this month that left out those proposed changes, and the legislative session concluded on March 8. Gov. Ron DeSantis said at a press conference in February that he opposed any backtracking on the law.

Other States Take Action

While the ambiguity of Florida's law has garnered a lot of attention from real estate practitioners, lawyers are also watching similar laws in other states, some of which were passed by legislatures to address specific national security concerns.

Oklahoma, for example, passed S.B. 212 last year, which prohibits noncitizens from acquiring title or owning land in the state either directly or indirectly through a business entity or trust.

The state has long-held restrictions on noncitizens owning land through Article XXII of the Oklahoma Constitution, but the constitution's provisions state the rules don't apply to people who "may become bona fide residents."

This exception has allowed a lot of people who aren't citizens to own real estate in the state because they live there, said Kari Hoffhines, an Oklahoma City-based shareholder in Crowe & Dunlevy's real estate and banking practice groups.

The state legislature passed S.B. 212 last year to stamp out illicit drug operations occurring in the state under the guise of legal activity, she said.

After medical marijuana was legalized in the state, numerous cannabis businesses, operated mostly by Chinese nationals, bought agricultural land across Oklahoma and opened growing facilities. Those businesses brought criminal activity along with them, including human trafficking and fentanyl trafficking, Hoffhines said.

U.S. Sen. James Lankford, R-Okla., testified about the issue at a September meeting for the U.S. Senate Committee on Agriculture, Nutrition and Forestry. He told senators that after the 2018 law passed, the state saw a "rush" of about 7,000 licensed marijuana growers begin operations in Oklahoma.

Roughly 1,000 of the businesses ran illegally, without full licensing capabilities, he said, and 75% of all the facilities are Chinese-owned, according to the state's estimates.

"What we have found is Chinese criminal organizations are partnering with Mexican cartels to be able to facilitate the distribution of marijuana nationwide, and they're using Oklahoma as the source for that," Lankford told the committee at the time.

Oklahoma's S.B. 212 allows the state to regulate direct and indirect owners of real estate, and it creates an exemption permitting foreign business entities that are "engaged in regulated interstate commerce in accordance with federal law" to own land, Hoffhines said.

In effect, the exemption in S.B. 212 allows a company owned by a noncitizen operating federally legal businesses to own property but prohibits an entity running a cannabis-growing business from having land, because such farms are illegal under federal law, Hoffhines said.

"They were very creative about this exemption. It directly targets the marijuana industry in our state," she said.

The law's passage, however, immediately wrought chaos upon the county clerk's offices, she said.

The law requires an affidavit from the buyer and seller to be attached to every deed, and clerks didn't immediately know which deeds would fall under the rules, Hoffhines said. The Oklahoma attorney general later published a general opinion, in February, that identifies which categories of deeds must include an affidavit.

Credit unions and financial institutions that issued loans for Oklahoma properties owned by foreign citizens are also confused by what their liabilities are under the new law and what the implications are for their liens.

"Banks have just been reeling over this," Hoffhines said. "Because they're like, 'Oh my gosh, this new law, foreign ownership of land, are my mortgages valid?'"

A Variety of Hurdles

Foreign land ownership legislation in Tennessee has made some local real estate transaction attorneys a little nervous.

While Russell's bill, H.B. 2583, moves through committees, a different piece of legislation that bars what it refers to as "sanctioned nonresident aliens" and "sanctioned foreign businesses" from acquiring real property is already on the books. H.B. 40, a law that went into effect in July 2023, prohibits such parties from real estate ownership and requires those violating the rule to divest their properties within two years.

Numerous other bills introduced earlier this year, including Russell's, appear to be drafted in an effort to narrow the scope of what H.B. 40 put into effect. One piece of legislation aims to create an ownership exception for any "Chinese entity" holding a "de minimis interest" in property, or an interest of less than 5%.

The status of these bills is in flux. Tennessee's legislative session typically lasts 90 days and ends in late April or early May.

Hollins, of Baker Donelson, said she and her fellow real estate practitioners had immediate concerns after H.B. 40 passed about whether the legislation was preempted by CFIUS.

They had questions about the constitutionality of the law's requirement that owners must give up property if they're found to be in violation, she said.

"From a practical standpoint, the implications on this are pretty draconian," Hollins said. "Both in terms of the fact that property can be taken and the fact that there's not much of a real, practical way to make the determinations that are apparently required to be made, in terms of close language here."

"In terms of the sanctioned foreign businesses and the sanctioned nonresident aliens, and so on and so on — trying to make those discernments is virtually impossible," she added.

Speaking generally about the various laws across the states, Requenez of Ropes & Gray said the uptick in new legislation has prompted him to work more with his private funds and asset management clients on refining their disclosures.

"To make it clear to investors that may be covered by some of the statutes that they may need to use an alternative investment vehicle to go into some of these transactions, or that they may be excluded from participating in the investment, if it's going to run afoul of some of the statutes that are out there," Requenez said.

But some of the new foreign land ownership laws may not be disturbing deal work in other states, because the measures don't differ from rules that are already in place.

Carl Barton, a Salt Lake City-based real estate partner with Holland & Hart LLP, said Utah's H.B. 186 "hasn't had much of an impact at all."

The law, which passed in 2023, outlaws any "restricted foreign entity" from acquiring an interest in land in Utah. The legislation defines that type of entity as a company or affiliate that the U.S. secretary of defense is "required to identify and report as a military company under" the National Defense Authorization Act of 2021, the bill's text shows.

Renewed Federal Attention

While concern over foreign ownership of land fuels new legislation in states across the country, the federal government's watchdog is calling on the Biden administration to pay closer attention to the issue.

The Government Accountability Office said in a report on Jan. 18 that the U.S. Department of Agriculture's processes for tracking foreign purchases of agricultural land are coming up short.

The GAO noted in the report that foreign investments in U.S. agricultural land grew to about 40 million acres in 2021, according to USDA estimates.

"USDA needs to collect, track, and share the data better, and developing a real-time data system would help," the GAO said in its announcement about the report.

Several federal lawmakers have proposed legislation during the current congressional session that aims to prohibit foreign entities from acquiring U.S. land.

In early 2023, Rep. Chip Roy, R-Texas, introduced the Securing America's Land from Foreign Interference Act, which aims to prohibit the purchase of public or private real estate located in the United States "by members of the Chinese Communist Party" and entities that are under the ownership, control or influence of the party. The bill's co-sponsors include Rep. Marjorie Taylor Greene, R-Ga., and about a dozen other Republican lawmakers.

A separate bill, introduced last year by Rep. Dale Strong, R-Ala., proposes a ban on purchases of agricultural land by people associated with the governments of China, Iran, Russia and North Korea. The legislation, dubbed the Protecting America's Agricultural Land from Foreign Harm Act of 2023, is co-sponsored by 30 Republicans and three Democrats.

Hollins of Baker Donelson told Law360 that concerns over bad actors from sanctioned countries buying land in Tennessee or anywhere else in the country are valid, but the issue should be approached from "a national perspective, as opposed to from a patchwork, state-by-state perspective."

"Maybe, somehow or another, the statute proves to protect Tennessee from those kinds of bad actors buying property in Tennessee," she said of H.B. 40. "If these bad actors buy a property in Arkansas, or Mississippi or Kentucky or wherever, then are we really addressing the issue?"

The state has seen tremendous growth in recent years, partly thanks to major companies moving in to do business.

"If you create this level of uncertainty, knowing that many, if not most of, those companies are international or have international contacts," she said. "Then why are you killing the goose that laid the golden egg?"