As State Bans On Foreign Property Ownership Proliferate, CRE Grapples With Compliance
A Florida law that takes effect July 1 is the first of what could be many new state edicts restricting certain foreign property ownership, a move that bill sponsors say is made in the name of national security but that could mire CRE pros in a morass of unanswered questions, potentially holding up deals.
Florida's not alone. More than 30 states have legislation, pending or otherwise, generally aiming to curtail foreign ownership of property, according to data from the National Conference of State Legislatures. Some of that legislation applies specifically to farmland or land close to sensitive sites, but other legislation is broader.
Whether these bills have the capacity to truly negate national security threats remains to be seen, and critics have called them racist and xenophobic, but the traction they have gained so far in two of the country’s hottest real estate markets has prompted brokers to wonder how to navigate the complex and controversial laws.
“Our clients want to understand, what documentation will I now need to close my deal, and is my pending deal now subject to disclosure, registration, or is it prohibited?” said Felicia Leborgne Nowels, government affairs and public policy partner at Akerman LLP. “Buyers, sellers, title insurers, closing agents — it impacts everyone in the deal.”
Leborgne Nowels is based in Florida but works with clients across the country and said she has been getting calls from clients on all sides of transactions that involve real estate in Florida. Florida Senate Bill 264 limits ownership of agricultural land or property on or within a 10-mile radius of a military installation or critical infrastructure facility, including water treatment facilities, electrical power plants and refineries.
“If you look at the landscape of Florida, agricultural land, military installations and critical infrastructure make up a great deal of Florida,” Leborgne Nowels said.
Florida investment sales brokers who spoke to Bisnow were eager for more clarity and education on how to follow the new law. “Foreign principals” from China, Russia, Iran, North Korea, Cuba, the Venezuelan regime of President Nicolás Maduro and Syria are on the list of those restricted from buying certain real estate in the Sunshine State.
As part of Florida’s law, buyers have to sign an affidavit under penalty of perjury that says they are in compliance with the state’s new law and are not considered part of one of the groups prohibited from buying certain real estate.
But brokers are still waiting for clarity on how exactly they can be in compliance with aspects of the new rules. Leborgne Nowels said she anticipates the Florida Real Estate Commission, which regulates real estate licenses in the state, will put forward guidance on details relating to the affidavit that buyers have to sign.
“You’re going to need education, and you’re going to need maps,” said Mike Pappas, CEO of The Keyes Co. and Illustrated Properties. “How do you disseminate that information correctly? And what are the consequences if somebody does break that law? All those things, I think, are unclear.”
Pappas said he has been on calls about transactions involving people from China, as well as buyers from other restricted countries, and there has been confusion about whether their deals can proceed. In South Florida, Pappas said there are huge communities of Cuban, Venezuelan and Russian people who could fall under the umbrella of the law — potentially eliminating buyers of real estate. Bisnow reached out to the sponsor of SB 264 but didn't receive a response.
Even the specter of these laws has given would-be investors pause.
Southwest Realty Group owner Kenneth Li told Bisnow he had been fielding calls from clients in other states and countries who were looking to move to Texas, but were putting their plans on hold. In one case, a privately owned Chinese housewares company that had been looking to move its manufacturing operations into Houston paused its search while the state’s legislation was pending, Li said.
Over the weekend of May 21 and 22, the Texas House did not pass the legislation out of committee, a move that essentially killed the bill for the regular session, the Houston Chronicle reported.
Li arrived in Houston in the 1980s as a student and stayed in the city. His uncle had a grocery store in southwest Houston, one of the first in what is now a sizable Chinatown, Li said. Since his arrival, he has racked up experience in land development as well as commercial and residential development. He is also a residential broker. Li has seen the Asian population in the city grow, and real estate has been a tool to help new arrivals to the city, himself included, achieve their dreams, he said.
Even though the latest version of the Texas bill no longer limited homeownership by foreign nationals — an initial flashpoint for many opponents — Li said he still didn’t support it. Limiting the buyer pool for properties is the opposite of free enterprise, he said, and putting additional regulations on transactions could end up hurting property owners as well as would-be buyers.
“The state legislature, they may have good intentions, but this may have unintended consequences,” Li said.
In late December 2022, a Texas senator proposed a bill to limit Chinese, Iranian, North Korean and Russian nationals from buying property including land and residences in the state. After much pushback, the scope of the law was reduced to farmland, timberland, and gas and oil rights. That version passed the Texas Senate in April and was being considered by the House. Bisnow reached out to sponsor Sen. Lois Kolhorst, but she declined to comment.
"We see the trend and it has accelerated,” Kolhorst said earlier this month. “China is buying up land everywhere. Food security is national security. We are in a place where it is all a battle.”
The bill built on Texas’ Lone Star Infrastructure Protection Act, which went into effect in 2021 and prohibited Texas businesses and governments from doing business with Chinese, Russian, North Korean and Iranian individuals if that business was connected to or provided access to “critical infrastructure” in the state, such as communications infrastructure or the electrical grid. The legislation was a direct response to a Chinese national’s purchase of 140,000 acres in Texas.
Foreign citizens and entities had an interest in 40.8 million acres of the country’s agricultural land in 2021, which translates to just over 3% of all privately owned land, according to the Congressional Research Service. However, from 2011 to 2021, foreign ownership of agricultural land increased 35.7%, according to the National Agriculture Law Center. Nationally, Canada was the largest foreign owner of American farmland as of 2021, followed by the Netherlands and Italy, the CRS found. China, North Korea and Iran didn't own enough agricultural land to be in the top five in that period.
Texas is one of 27 states in which foreign owners held more than 500,000 acres in 2021, the Congressional Research Service found, but Texas also has the most agricultural land in the country, with more than 127 million acres, according to the Texas Department of Agriculture.
Texas’ bill wouldn't have entirely taken ownership off the table for citizens of the countries the bill targets. For example, people in the prohibited groups could have bought land with co-owners, the Austin Business Journal reported. And even though many are concerned damage has been done by the legislation, others are in support of the idea if it protects American soil.
Macfarlan Capital Partners partner Trevor Hightower said he generally supports legislation that prevents certain foreign entities from owning property that could jeopardize the food supply or national security, such as farmland or properties close to military bases.
Macfarlan is a Dallas-based private equity sponsor that, since 2021, has focused specifically on farmland investments nationally. It is pursuing longer-term holds on the properties it buys, so it has not yet been in a situation where any of these laws limiting foreign ownership of farmland might come into play.
Hightower said that while the firm certainly seeks to get the best returns for its investors, “you wouldn't want to sell at the highest price in a way that would harm the country or harm people within the country.”
But Hightower was clear that some foreign investment is critical and an important part of the economy.
“You definitely don’t want to paint with too broad a brush,” said Hightower, who served in the Air Force before entering the commercial real estate industry. “Foreign investment in general is a great thing.”
UPDATE, MAY 23, 9 A.M. PT: This story has been updated to reflect that the proposed Texas law did not advance out of committee and will not move forward in the regular session.