Navigating Foreign Investments in United States Real Estate

Foreign investment in U.S. real estate surpassed $1.2 trillion in the last 15 years, and foreign ownership of agricultural land has increased by 50 percent since 2017. Most of the investors in agricultural land built wind farms and half of the foreign realty investors purchased vacation homes.

But some scholars express concerns about the negative impacts of foreign real estate investments.

Historically, regulating foreign investors has been the primary responsibility of the Committee on Foreign Investments in the United States (CFIUS), an interagency committee that reviews potential threats to national security posed by various transactions involving foreign investment in the United States.

In addition, foreign prospective investors in U.S. real estate must navigate several federal reporting requirements concerning tax, antitrust, and immigration laws. For example, the Agricultural Foreign Investment Disclosure Act of 1978 includes requirements for foreign real estate investors that Congress intended to increase transparency in investments in agricultural land.

The Government Accountability Office (GAO) explains that foreign real estate investments can raise national security concerns. In 2022, for example, a Chinese company purchased 370 acres of agricultural land near an Air Force research base in North Dakota. CFIUS determined that it did not have jurisdiction over the purchase and declined to intervene. Federal legislators and members of the Air Force criticized the purchase and the decision for concerns that the land would be used to spy on the base. Scholars argue that this decision prioritized financial gain from foreign investment over addressing the greater national security threat posed by geopolitical tensions with China.

Many scholars also express concerns with the economic implications of foreign investments in housing markets. Over the last two decades, housing affordability has declined dramatically. In some cities, housing prices have reached ten times the local median household income. These scholars argue that rising foreign investment in housing has driven up demand in areas already struggling with housing affordability, contributing to sharp increases in housing prices in those cities and nearby areas.

In response, many federal and state legislatures have begun to restrict foreign investment in domestic real estate, especially for agricultural land near military bases and within housing markets. Louisiana, for example, enacted a regulation prohibiting investors from U.S. adversary states such as China, Russia, and Iran from purchasing or leasing immovable property within the state. Oklahoma went one step further and enacted a law preventing all aliens and noncitizens from acquiring title or owning land either directly or indirectly through a business entity or trust.

This week’s Saturday Seminar examines the efficacy and legality of regulating foreign investment in U.S. real estate.

• In a report on foreign investments in U.S. agricultural land based on the Agricultural Foreign Investment Disclosure Act’s database, GAO recommends that the Secretary of Agriculture improve the accessibility of data related to foreign investments in agricultural real estate to protect national security interests. GAO found that CFIUS lacks regular and timely access to the Agricultural Foreign Investment Disclosure Act’s database, which could cause national security risks to go unnoticed. GAO suggests that the Secretary of Agriculture make all data relating to foreign investments in agricultural real estate available to CFIUS, create an online submission system and public database for this data, and improve the review and validation process for this information.
• In an article published on the website of the Brookings Institution, Matthew Collin of Brookings, Karan Mishra of the Paris School of Economics, and Andreas Økland of Norwegian University of Life Sciences recommend that the U.S. Department of the Treasury take action through recent policy innovations to identify the owners of real estate shell companies. They proposed that the Treasury Department use the Corporate Transparency Act, which empowers the Financial Crimes Enforcement Network to combat financial crimes, to make ownership information for corporate real estate purchases publicly available. They note that similar measures in the United Kingdom helped to identify properties owned by sanctioned foreign officials and to reduce offshore investment.
• In a recent working paper, David Andolfatto of Miami Herbert Business School and Marie Rekkas of Simon Fraser University analyze the impact of metro Vancouver’s 15 percent foreign buyers tax (FBT), an extra tax on residential properties bought by foreign nationals or foreign-controlled corporations. Andolfatto and Rekkas estimate that the FBT significantly lowered the average home price in the greater Vancouver area. The FBT’s effects, however, varied with a bigger impact on wealthier areas and less impact on lower-priced regions and apartments, according to Andolfatto and Rekkas. They suggest that although the FBT may not improve affordability in lower-priced housing regions, it could help support lower-income communities by increasing funding for public housing or other indirect initiatives.
• In a report on state regulation of foreign ownership of U.S. land, the Congressional Research Service (CRS) argues that existing state laws aimed at restricting foreign property investment could unjustly target individuals based on their nationality. CRS notes that from January to June of 2023, 16 states passed legislation on foreign land ownership, and that legislators in 20 other states introduced similar bills. CRS explains that some states have implemented mandatory disclosure laws, while others have prohibited transactions and may require foreign divestiture. CRS warns that these state-level restrictions could discriminate against purchasers based on their national origins. In response, CRS proposes that Congress use its authority to regulate foreign commerce to override such discriminatory state laws.
• Courts should consider foreign experts’ opinions to determine whether foreign investments pose a national security risk, proposes Matthew S. Erie of University of Oxford in an article in the Wisconsin Law Review. Erie discusses a recent lawsuit brought by Chinese nationals challenging an allegedly discriminatory Florida law that restricts noncitizens’ abilities to own property. He explains that the Eleventh Circuit granted two of the plaintiffs a partial injunction based on their federal preemption claims, but the court appears poised to determine that the law is valid in an imminent decision. Erie notes that the decision illustrates states’ broad authority to regulate property ownership. Erie advocates judicial reform to prevent states from targeting Chinese nationals with discriminatory laws and suggests that courts collaborate with China experts to create a multi-factor test for determining whether individuals are linked to the Chinese government.
• In an article in the Review of Financial Studies, Zhimin Li of China’s Peking University HSBC Business School, Leslie Sheng Shen of Federal Reserve Bank of Boston, and Calvin Zhang of the Federal Reserve Bank of Philadelphia, argue that although foreign investment in U.S. real estate supports economic growth, it can also contribute to gentrification. An increase in housing purchases by foreign Chinese buyers led to a 30 percent rise in home prices in recent years in California markets, the authors note. Although the benefit of the influx of foreign capital has had some positive impact on local employment, Li, Shen, and Zhang conclude that this increase in housing prices outweighs the benefits of foreign investment.