News
January 6, 2021

Secure Federal LEASEs Act Imposes New Foreign Ownership Disclosure Requirements for Some Federal Government Leases

Advisory

Just before year end, the Secure Federal Leases from Espionage and Suspicious Entanglements Act (Secure Federal LEASEs Act or Act) became law. The Act, a bipartisan effort to address potential national security risks posed by foreign owners of high-security spaces leased to the General Services Administration (GSA) and other federal entities with independent leasing authority (collectively, "Federal lessees"), imposes significant disclosure requirements with respect to the ownership of property owners seeking to become federal landlords of facilities with a security level of III or higher and existing landlords of such properties. 

Background

With the Act, Congress aimed to address certain national security risks identified in a 2017 US Government Accountability Office (GAO) report, which found that certain high-security federal agencies, including six Federal Bureau of Investigation field offices and three Drug Enforcement Administration field offices, occupied buildings that were owned or controlled by foreign entities. According to the report, the majority of federal tenants were unaware that the spaces GAO had identified were subject to foreign ownership or control, exposing these agencies to heightened risk of surreptitious physical or cyber espionage by foreign actors. The report also noted that GAO was unable to identify the owners of approximately one-third of the federal government's high-security leases because such ownership information was unavailable for those buildings.

As the US government's "landlord," GSA serves as the central leasing agent for federal leases and is responsible for managing and obtaining space on behalf of multiple federal agencies. When GSA enters into a leasing agreement, the agency becomes the "tenant" of GSA, with GSA acting as the lessee of the property. Under its current practice, GSA uses information contained in its self-administered System for Award Management (SAM) to collect foreign ownership information for potential lessors. However, as Congress recognized in the Act, the SAM does not capture more nuanced forms of foreign control such as beneficial ownership, and GSA "lacks an adequate system for doing so."

The Act sets up a disclosure and notification process that GSA is required to eventually systematize to gather information about the nationality of immediate, highest-level, and beneficial owners of a potential high-security leased space, demonstrating the US government's heightened concern about foreign investment in US real estate that is of critical security importance.

Disclosure and Notification Requirements

The Act imposes the following reporting requirements:

  • Prior to entering into a lease agreement with a "covered entity" or allowing such a landlord to convey its interest in a leased space that qualifies as a "high-security leased space"—meaning a lease with a security level of Level III or above—a Federal lessee must require the landlord to identify and disclose whether the "immediate owner" or "highest-level owner" of the leased space is a foreign person or a foreign entity, and to identify the country associated with each ownership entity. A "covered entity" is a person, corporation, company, business association, partnership, society, trust, or any other nongovernmental entity, organization, or group, or any governmental entity or instrumentality of a government. Leases with the Department of Defense and for federal tenants within the intelligence community (as defined in the National Security Act of 1947) are expressly excluded from these requirements, presumably because there are already significant reporting requirements with respect to such leases.
  • The Act requires disclosure of the "immediate owner" (the entity that has direct control of the offeror of a lease, as defined by ownership or interlocking management, identity of interests among family members, shared facilities and equipment, and the common use of employees) and "highest-level owner" (the entity that owns or controls an immediate owner of the offeror of a lease or that owns or controls entities that control the immediate owner).
  • Notably, the Act also requires disclosure of whether an entity "involved in" the financing of the leased space is a foreign person or entity. The Act itself provides no guidance on the meaning of this term.
  • Once a lease is executed, the Act requires annual reporting of the ownership of the landlord (and financing of the property) with respect to each prior one year period.
  • The Act applies to any lease or novation agreement entered into on or after June 31, 2021.

Additional Requirements

The Act also imposes two additional requirements for Federal lessees of high-security leased spaces:

  • First, any lease agreement between a Federal lessee and a covered entity of a high-security leased space—regardless of the nationality of the various types of owners—must include language restricting access to the building by the covered entity and its property management company without prior approval from the Federal tenant. Such approval could be granted by the Federal tenant only if the Federal tenant determined that the access is clearly consistent with its mission and responsibilities.
  • Second, GSA must coordinate with the Office of Management and Budget to develop a government-wide plan for identifying not only all immediate or highest-level owners, but also all beneficial owners, of high-security leased spaces prior to entering into a lease agreement. Unlike the direct control–based immediate owner and highest-level owner, the Act defines the term "beneficial owner" to include any person that—through a contract, arrangement, understanding, relationship, or otherwise—exercises control over the covered entity or has a substantial interest in or receives substantial economic benefits from the assets of the covered entity, with some exceptions. GSA and OMB's plan must require the Federal lessee to collect the foreign ownership information for any immediate, highest-level, or beneficial owner that is a foreign person and, upon such a disclosure of foreign ownership, to notify and consult with the Federal tenant.

It is not clear that this requirement will substantially change the base reporting requirements regarding direct and indirect ownership of applicable landlords described above. However, given the broad definition of beneficial owner, it appears that Congress intends to require disclosures beyond just ownership. How exactly that will be interpreted is yet to be determined. The Act requires that GSA begin implementing its government-wide plan for identifying all immediate, highest-level, or beneficial owners by December 31, 2022.

High-Security Leased Spaces

The disclosure requirement applies to leases of all "high-security leased space," which is space that will be occupied by federal employees for non-military activities and that has a facility security level of III, IV, or V. A building's facility security level depends on the number of federal employees who work there, the volume of public contact, the physical footprint, and the functions of the Federal tenant housed there. Facility security level III includes buildings with 80,000 to 150,000 square feet, 151 to 450 federal employees, and moderate to high public access. Facility security level IV includes buildings with 150,000 square feet or more, more than 450 federal employees, and a high level of public access. Facility security level V includes buildings that meet the criteria for Level IV but that have mission functions critical to national security. Notably, however, the Act specifically exempts the Department of Defense and the heads of any element of the intelligence community from the definition of "Federal lessees" to whom the Act's disclosure requirements apply. Elements of the intelligence community are also exempted for the definition of "Federal tenant," presumably because the intelligence community element will manage its own security concerns and mitigation measures.

Implications

The Act will place notable burdens on covered entities attempting to compete in the lucrative US government leasing market. Such entities should prepare to face increased scrutiny when arranging leases of high-security spaces.

The Act also marks yet another national security–based restriction that government contractors must take into consideration more generally. For example, a critical consideration for any government contractor is compliance with Section 889 of the 2019 National Defense Authorization Act limiting use of certain Chinese equipment or services, which is effectuated under Federal Acquisition Regulation (FAR) provisions 4.2102, 52.204-24, 52.204-25, and 52.204-26. Additional recent national security–based restrictions include Executive Order 13920 restricting certain acquisitions of bulk-power systems, and Executive Order 13873 on Securing the Information and Communication Technology and Services Supply Chain.

Moreover, the Act's focus on more nuanced forms of foreign influence and access is notable when viewed in light of the related but independent expansion of the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions under the Foreign Investment Risk Review Modernization Act (FIRRMA). Unlike CFIUS's traditional jurisdiction over transactions that result in foreign "control" over a US business, FIRRMA expanded CFIUS's jurisdiction to include certain transactions involving the purchase or lease by, or a concession to, a "foreign person" of certain sensitive real estate in the United States, even where there is no accompanying investment in a US business. FIRRMA also expanded CFIUS's oversight to include "other investments" that provide a foreign person an equity interest in and certain rights regarding US businesses dealing with critical technologies, critical infrastructure, or sensitive personal data of US citizens. As with FIRRMA, the Act should serve as a strong signal that the US government is increasingly concerned with national security issues implicated by access and economic rights granted to foreign actors.

With 14 offices around the globe, Arnold & Porter, offers a multi-disciplinary, cross-functional team of lawyers with leading experience in national security litigation, regulatory compliance and real estate.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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