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Real Estate Beneficial Ownership Regulatory Alert: Florida Restricts Real Estate Ownership by Individuals and Entities From "Countries of Concern"

Date: 11 September 2023
US Real Estate Alert

SUMMARY

On 17 August, a Florida judged denied a bid by four Chinese citizens and a real estate brokerage firm for summary judgment to block enforcement of Senate Bill 264. Effective 1 July 2023, Senate Bill 264 (codified under Fla. Stat., ch. 692, pt. III – Conveyances to Foreign Entities) (the Statute), prohibits the direct or indirect ownership of specific categories of real estate by “foreign principals” from a foreign “country of concern,” defined as the People’s Republic of China, the Russian Federation, the Islamic Republic of Iran, the Democratic People’s Republic of Korea, the Republic of Cuba, the Venezuelan regime of Nicolás Maduro, or the Syrian Arab Republic, or any agency of or any other entity of significant control of such foreign country of concern. The Statute prohibits the acquisition of (1) any interest in agricultural land by a foreign principal, (2) any interest in real property located near a military installation or critical infrastructure by a foreign principal, and (3) any real estate interest by a foreign principal of the People’s Republic of China, subject to very limited exceptions. The law is currently in effect; however, the case is still ongoing.

WHAT SHOULD CLIENTS DO NOW AND NEXT?

Failure to comply with the requirements of the Statute may well expose individuals and entities to civil penalties, as well as potential forfeiture of their property. If you are an entity that may potentially have any beneficial owners from a country of concern, you should review ownership structures to determine if any reporting requirements or restrictions will apply to you. Notably, the Statute applies to acquisitions of any interest in land, and it is unclear whether it also could apply to certain leasehold estates. Sellers, buyers, landlords, tenants, and real estate professionals should remain aware of Florida’s requirements for disclosures of foreign principals at the inception of contract negotiations and at closing of real estate purchase and leasing transactions. Florida mortgage lenders and landlords likely will adopt further documentation requirements for verifying the status of borrowers and tenants under “know your client/tenant” inquiries and disclosures.

WHAT REAL ESTATE TRANSACTIONS DOES THE STATUTE APPLY TO?

The Statute applies in three scenarios: (1) agricultural land held by a foreign principal; (2) property near military installations or critical infrastructure held by a foreign principal, and (3) real estate held by a foreign principal from the People’s Republic of China.1

Under these rules, a “foreign principal” is broadly defined and includes an entity or individual that has ties to a “country of concern,” including a person who is domiciled in a country of concern and not a US citizen or lawful US permanent resident, an entity organized or having its principal place of business in a country of concern or a subsidiary of such entity, or any person, entity, or collection of persons or entities described above having a controlling interest in an entity or subsidiary formed for the purpose of owning real property in Florida.2  

There is an exemption for an indirect de minimus ownership interest in the underlying land. A foreign principal may acquire and hold an ownership interest if such interest is held as equities in a publicly traded company owning the land and the ownership interest is (a) less than 5% of any class of registered equities or less than 5% in the aggregate in multiple classes of the registered equities or (b) a noncontrolling interest in an entity controlled by a company that is both registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and is not a foreign entity.3

Prohibition Related to Agricultural Land

Foreign principals are barred from, directly or indirectly, acquiring an interest in agricultural land.4 For these purposes, “agricultural land” means land classified as agricultural by the property appraiser as required under section 193.461 of the Florida Statutes.5 In general, this is land that must adhere to specific use requirements in order to obtain and maintain the tax advantages of the agricultural classification. 

Prohibition Related to Property Near Military Installations or Critical Infrastructure

Foreign principals are also prohibited from acquiring property interests if the underlying property lies within 10 miles of a military installation or critical infrastructure facility.6 The definition of “critical infrastructure facility” is comprised of ten (10) types of facilities that employ security measures that are designed to exclude unauthorized persons, such as electrical power plants, water treatment facilities, seaports, and airports.7 There is a limited residential property exception that allows foreign principals to acquire residential real property of no more than two acres in size if (a) the residential real property is not located within five miles of a military installation, (b) the foreign principal holds a US visa, and (c) the purchase is in the name of the US visa holder.8  

Prohibition on the Acquisition of Property by Chinese Concerns

Finally, foreign principals of the People’s Republic of China are prohibited from acquiring any real property located within the state of Florida.9 The limited residential property exception, described above, is available to a natural person who would otherwise be prohibited from acquiring such property.10 

Exceptions

Foreign principals who owned an interest in property as describe above prior to 1 July 2023, may continue to hold such interest.11 However, foreign principals will be required to register such ownership with the Florida Department of Agriculture and Consumer Services (FDACS), in the case of agricultural land, and the Florida Department of Commerce (formerly, the Department of Economic Opportunity) (FDC), in all other cases, before 1 January 2024.12  

In addition, a foreign principal may acquire prohibited property on or after 1 July 2023, by devise or descent, through the enforcement of security interests, or through the collection of debts, provided that the person or entity registers such ownership and sells, transfers, or otherwise divests itself of such real property within three years after acquiring the real property.13 

Compliance and Penalties

Purchase and sale contracts involving assets that include Florida real property must be accompanied by a notice to be acknowledged by the buyer, either as a separate disclosure document or as an element of the contract. Furthermore, at closing of any acquisition or other transfer of Florida real estate, the buyer must provide an affidavit certifying under penalties of perjury that it is not a foreign principal as defined in section 692.201(4) and it is otherwise in compliance with the new Statute.14 Notably, completion of both the notice and the affidavit will require careful review and understanding of the Statute.

The failure to obtain an affidavit will not create a title defect or affect insurability, and absent actual knowledge that the buyer is a foreign principal, the closing agent will not have civil or criminal liability for noncompliance.15 However, interests in land acquired in violation of the ban may result in forfeiture of the property to the state.16 Enforcement is delegated to the FDACS, in the case of agricultural land, and the FDC, in the case of other property, which are empowered to file a lis pendens and petition the circuit court of applicable jurisdiction to enter an order of forfeiture.17 In the case of forfeiture, the state acquires the property subject to the rights of any lienholders.18 

In advance of the Florida Real Estate Commission (FREC) promulgation of official forms for Notices to Purchasers and Affidavits for Purchasers with Foreign Interests, the Florida Land Title Association (FLTA) is recommending use of a set of forms that can be obtained at https://www.flta.org/ForeignInterests, which include forms of affidavits for individuals or entities with foreign interests, and a form of notice that contains a summary of the legal prohibitions and compliance requirements.

EFFECTIVE DATES AND REPORTING

The prohibitions on the acquisition of agricultural land by foreign principals, property near military installations or critical infrastructure by foreign principals, and real estate by foreign principal from the People’s Republic of China, as well as the affidavit requirement, became effective on 1 July 2023.19 The Statute does not provide a stated exemption for properties that went under contract before 1 July 2023 but closed (or are scheduled) after that date. Contracts and leases presently under negotiation and future transactions should address the prohibitions and compliance requirements and buyer disclosures. All buyers and tenants, regardless of foreign principal status, will be required to comply with these requirements after 1 July 2023. 

As noted above, for property held before 1 July 2023, or acquired after such date by devise or descent, through the enforcement of security interests, or through the collection of debts, foreign principals will have the obligation to report and register their ownership to the FDACS, in the case of agricultural land, or the FDC, in all other cases, before 1 January 2024 or within 30 days of such acquisition.20 Registration will be deemed filed late and subject to fines if filed 30 days after 31 January 2024 or 30 days after such acquisition.21 Failure to register may result in a civil penalty of US$1,000 per day of noncompliance.22

RECENT DEVELOPMENTS

On 22 May 2023, a lawsuit was filed in the U.S. District Court for the Northern District of Florida claiming that the Statute violates the Equal Protection Clause, Due Process Clause, and Supremacy Clause of the U.S. Constitution and the Fair Housing Act and is seeking an injunction against implementation of this Statute.23 The Department of Justice issued a Statement of Interest arguing that the Statute is unconstitutional.24 However, on 17 August 2023, a Florida federal judge denied the plaintiffs motion for preliminary injunction, finding that the plaintiffs did not demonstrate a substantial likelihood of success on the merits of their claims.25 An emergency motion for an injunction pending appeal was quickly filed by the plaintiffs on 21 August 2023, and denied on 23 August 2023.26 On 26 August 2023, the plaintiffs filed for an injunction and expedited appeal with the US Court of Appeals for the Eleventh Circuit. The case is still ongoing. 

Meanwhile, the Statute authorizes the FDC, FDACS, and FREC to begin rulemaking concerning compliance and implementation of this Statute. The FLTA forms are precursors to such future rulemaking, and thus eventually will be superseded by such FREC rules and related forms when adopted under the Florida Administrative Code. On 7 August 2023, the FDC and FREC announced plans to propose regulations related to Senate Bill 264. 

Florida is not alone in its interest in tracking or prohibiting foreign ownership of certain real estate assets. In addition to the federal reporting regime under the Agricultural Foreign Investment Disclosure Act of 1978, as amended, many states, including Alabama, Arkansas, Idaho, Louisiana, Montana, Ohio, Tennessee, Utah, and Virginia, which have each enacted laws in in 2023, have implemented various restrictions and reporting requirements related to foreign beneficial ownership of real estate. Moreover, the United States is not unique in its interest in the identity of foreign owners of real estate within its borders. The United Kingdom and Australia, among others, have recently enacted laws to monitor in-bound foreign investment. K&L Gates is available to advise on these compliance issues.

1 Fla. Stat. § 692.201-205 (2023).

2 Fla. Stat. § 692.201(4) (2023).

3 Fla. Stat. §§ 692.202(1), 692.203(1), 692.204(1)(b) (2023).

4 Fla. Stat. § 692.202(1) (2023).

5 Fla. Stat. § 692.201(1) (2023).

6 Fla. Stat. § 692.203(1) (2023).

7 Fla. Stat. § 692.201(2) (2023).

8 Fla. Stat. § 692.203(4) (2023).

9 Fla. Stat. § 692.204(1) (2023).

10 Fla. Stat. § 692.204(2) (2023).

11 Fla. Stat. §§ 692.202(2), 3(a), 692.203(2), (3)(a), 692.204(3), 4(a) (2023).

12 Id.

13 Fla. Stat. §§ 692.202(4), 692.203(4), 692.204(5) (2023).

14 Fla. Stat. §§ 692.202(6), 692.203(6), 692.204(6) (2023).

15 Id.

16 Fla. Stat. §§ 692.202(7), 692.203(7)(a), 692.204(7)(a) (2023).

17 Fla. Stat. §§ 692.202(9), 692.203(7), 692.204(7)(b) (2023).

18 Fla. Stat. §§ 692.202(6)(e), 692.203(6)(e), 692.204(7)(e) (2023).

19 S. 264, 2023 Leg., Reg. Sess. § 12 (2023) (enacted).

20 Fla. Stat. §§ 692.202(2), 3(a), 692.203(2), (3)(a), 692.204(3), 4(a) (2023).

21 Id.

22 Id.

23 Complaint, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. May 22, 2023).

24 Amicus Curiae Brief by United States, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. June 27, 2023).

25 Preliminary Injunction Decision, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 17, 2023).

26 Notice of Appeal, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 21, 2023); Order Denying Motion for Injunction Pending Appeal, Shen v. Wilton, Case No. 4:23-cv-208-AW-MAF (N.D. Fla. August 23, 2023).

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.

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