Restrictions on foreign ownership of U.S. real property: A potential headache for Canadian investors

It is a xenophobic moment in American politics. Controversy around our (southern) border will be a significant issue in the 2024 federal elections. Wariness towards certain “bad actor” regimes remains high due to an increasingly hostile global atmosphere. Political tension remains high after the federal government determined it had no authority to block a purchase of sensitive land by a Chinese company. This confluence of factors has re-energized a movement to restrict foreign ownership of U.S. land, particularly agricultural land. A recent proposed expansion of a federal statute requiring registration of foreign ownership of U.S. agricultural land may cause a significant compliance burden for Canadian investors with ownership in U.S. real property.

Approximately 3% of private land in the United States is owned by foreign entities, and Canadians represent the largest foreign holders of U.S. land. Unfortunately, restrictions on ownership that ostensibly target hostile actors sometimes are drafted broadly enough to apply to Canadians as well. This can create a significant compliance burden for Canadian investors with large direct or indirect holdings of U.S. real property.

There are three primary realms in which foreign investment in U.S. real property is regulated; federal ownership disclosure requirements, state law and the Committee on Foreign Investment in the United States (CFIUS).

Federal law

The Agricultural Foreign Investment Disclosure Act (AFIDA) of 1978 is a federal law which requires that a “foreign person” that acquires or holds an interest in agricultural land located in the U.S. must disclose such transactions to the USDA by making certain regulatory filings within 90 days of acquisition of the relevant land. Penalties for non-filing or late filing are assessed based on the amount of time the report is past due and can reach up to 25% of the fair market value of the relevant real property interest. Who is a “foreign person” in the context of AFIDA? According to federal regulations, a foreign person can be a natural person, legal entity, government or a domestic legal entity in which at least 10% is held directly or indirectly by a member of one of those groups¹. Individual analysis is fact-specific based on the structure of ownership of the particular investment, however we expect that many Canadian investors may inadvertently be failing to comply with these regulations because of a belief that they do not apply to “friendly” governments. Canadian investors that primarily own non-agricultural property need to be aware of these restrictions as well; “agricultural land” is defined and interpreted in a manner that captures a broader use category than expected, such as land that was formerly used for farming that now hosts a solar farm.

Recent developments

A bipartisan group of U.S. senators recently introduced the “AFIDA Improvements Act of 2024” which will update the AFIDA regulations and handbook, streamline data sharing with CFIUS, direct the USDA to leverage internal data to identify non-filers and, most importantly for Canadian investors, introduce a data collection requirement from all foreign persons with a minority stake in an agricultural land asset, including through indirect or “shell” ownership. While legislative statements accompanying the bill have made reference to preventing “foreign adversaries” from acquiring U.S. farmland, the proposed bill does not draw a bright distinction between friend and foe when it comes to its registration requirements. If a version of this bill is passed in 2024, we expect that enforcement and oversight of AFIDA will be rejuvenated and we urge Canadian investors to not be caught flat-footed.

State law

In the last 10 years, the number of states that have codified restrictions on foreign ownership of land has risen from 14 to 24, and new restrictions are being proposed in each legislative session. As of January 2024, at least five states have active bills in session to restrict foreign ownership of land. Many states limit their restrictions to a list of specific “bad actor” countries—for example, a proposed bill in Michigan would restrict a governmental entity, business or citizen of a “nonmarket economy country” or a “state sponsor of terrorism” from purchasing land. Some restrictions, however, are drafted broadly enough to capture Canadian businesses—Washington state’s house of representatives, for example, has proposed a bill that would restrict a “foreign business entity” (which draws no distinction between foreign countries) from acquiring or leasing any interest in agricultural land in that state.

We expect that this surge of legislative activity will ultimately have a limited effect on Canadian investors given that the intended targets of these laws are primarily “bad actors”, however there may be a frictional period where Canadians are caught in the enforcement maze prior to courts and regulatory bodies clarifying legislative text that may be overbroad.

CFIUS

CFIUS has long maintained the ability to review foreign investments in U.S. real estate indirectly through its review of the acquisition of U.S. businesses. In February 2020, however, CFIUS’s authority expanded to review “covered real estate transactions” i.e., those located within proximity to certain sensitive places such as military bases and ports. The rules governing the review of covered real estate transactions define certain categories of “covered real estate” by reference to proximity (ranging from 1 to 99 miles) from sensitive sites. In 2023, CFIUS determined that it did not have jurisdiction to review the proposed purchase by a Chinese company, Fufeng Group Limited, of a corn milling plant in North Dakota that is 12 miles from Grand Forks Air Force Base, including because the base was not on the list of sensitive installations at the time. This prompted a significant outcry from politicians at every level of government and led to a swift expansion of the list of sensitive installations (to include Grand Forks, among others) as well as renewed calls for legislation to expand CFIUS’s authority to review real estate transactions. Senator Jon Tester of Montana has recently introduced a bill to expand CFIUS’ authority to review all purchases of agricultural land, including by adding the Secretary of Agriculture as a standing member of CFIUS.

Some Canadian entities benefit from Canada’s inclusion on the “white list” of excepted foreign states (also including Australia, the UK and New Zealand), which exempts “excepted investors” from CFIUS’s coverage of real estate transactions and mandatory filings. We will continue to monitor renewed calls to expand CFIUS’ purview through legislative or regulatory changes to ensure that our Canadian friends and clients remain onside.