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Legal Update

Foreign Ownership of Federally Leased Property to Draw New Scrutiny

13 February 2017
Mayer Brown Legal Update

The US Government Accountability Office (GAO) recently issued a report that calls attention to the prevalence of foreign ownership of office space and other real property leased to the federal government. The report concludes that lease officials and federal agency tenants have given insufficient consideration to the potential risks posed by entering into a lease for a property whose beneficial owner may be a foreign person. This report, and responses of agencies to it, suggests that such leases, and the acquisition by foreign persons of such buildings, may draw new scrutiny in the near future, including review by the Committee on Foreign Investment in the United States (CFIUS).1

Federal Lease Process

The General Services Administration (GSA) has general authority to lease real property (such as office space) on behalf of agencies that will be tenants in such space. Consistent with laws that require competition in the award of government contracts, GSA typically conducts competitions through the issuance of solicitations for offers (SFOs). Entities interested in leasing space to the federal government can respond to such solicitations by submitting proposals in accordance with the SFO, which may lead to negotiations with GSA and the award of a lease.

In addition to special terms specifically relevant to a lease (such as the treatment of real estate taxes and occupancy considerations), SFOs include a variety of standard government terms that are included in other government contracts. These terms do not include any prohibition on the award of a contract to a foreign entity or ask the respondent to identify its country of ownership.

Leases often typically include security requirements as well as measures that define the extent to which the lessor may access or enter the leased space.

GAO Report

On January 30, 2017, GAO issued a report regarding foreign ownership of properties that are leased by federal agencies. (See GAO-17-195, FEDERAL REAL PROPERTY: GSA Should Inform Tenant Agencies When Leasing High-Security Space from Foreign Owners, January 2017.) GAO stated that it had been told by federal officials who assess foreign investments in the United States and some tenant agencies that leasing space in foreign-owned buildings could present security risks such as espionage and unauthorized cyber and physical access.

According to the report, GSA is leasing high-security space from foreign owners in 20 buildings across the United States, including Chinese entities. High-security space is defined as Interagency Security Committee facility security levels III, IV and V. These levels consider the number of employees and the nature and/or activity of the tenant, such as law enforcement or national security. Level V is the highest level.

GAO found that 9 of 14 tenant agencies that GAO contacted were unaware that the space in the building they occupied was foreign-owned while the remaining agencies knew the space was foreign-owned but had not taken actions to mitigate the risk or were not concerned.

The GAO report notes that GSA’s current leasing process does not require an assessment of the extent of foreign ownership. GAO commented that it had difficulty identifying ownership information for 500 of 1,406 high-security space leases it had reviewed. GAO recommended that GSA determine whether the beneficial owner of high-security leased space is a foreign entity and, if so, share that information with the tenant agencies for any needed security mitigation. As noted in the report, GSA agreed with the recommendation.

Based on GSA’s response to the GAO report, GSA can be expected to require that offerors for a lease identify any foreign ownership for purposes of advising the tenant agency of such status to facilitate an assessment of potential risks. Following execution of a lease, GSA also might require notification of any change in ownership even if the lessor remains the same legal entity. Depending on the nature and extent of the foreign ownership, the tenant agency may request that additional measures be put into effect, such as restrictions on access to or control of the leased facilities.

CFIUS Review

Parties to a transaction where a foreign person acquires control of a US business can file a notification with CFIUS of the transaction. CFIUS conducts a review of the transaction to determine if it threatens US national security. If parties receive CFIUS approval, they receive a legal safe harbor that the president will not exercise his authority to block or unwind the transaction. If a foreign person is acquiring control of a US property that leases space to the federal government, the parties should carefully assess whether a CFIUS filing is warranted. The more sensitive to the national security that the government’s use of the leased space is, the more likely it is that a CFIUS filing is warranted. CFIUS filings may also be warranted where a foreign party is leasing or purchasing property that is proximate to a federal government site, particularly a military or intelligence facility.

1 CFIUS conducts national security reviews of foreign investment in the United States.

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