U.S. farmland has drawn significant interest over the past decade from investors looking for alternative real estate investments. In light of post-pandemic concerns about supply chain and food security, federal lawmakers are increasingly scrutinizing such investments, particularly where foreign investors are involved. To date, foreign ownership of agricultural land has been lightly regulated at the federal level and by a patchwork of state laws that run the gamut from outright bans to simple reporting requirements; however, growing tension with certain countries (most notably China) has made foreign ownership of U.S. real property, including farmland and other agricultural assets, a key talking point on Capitol Hill, and legislative proposals have proliferated. While much attention has been focused on China, these proposals are varied, creating a new and growing regulatory regime that all investors and asset managers will need to grapple with to reap the returns of investments in U.S. farmland.
Foreign investment in U.S. farmland is currently subject to federal reporting requirements under the Agricultural Foreign Investment Disclosure Act. AFIDA was implemented in the 1970s to help Congress understand the effect of foreign ownership of U.S. agricultural land on family farms and rural communities. To that end, foreign investors who acquire, hold or transfer ownership interests in farm, ranch, timber or forest land are required to report such transactions to the U.S. Department of Agriculture (USDA). These obligations apply to foreign individuals, foreign governments, foreign business entities, and domestic business entities in which “significant interest or substantial control” is directly or indirectly held by a foreign individual, foreign government, foreign business entity, or a combination of the foregoing.
USDA annually publishes a report based on AFIDA filings showing trends in such investments to help lawmakers and the public understand the impact of foreign investment in U.S. farmland. To encourage voluntary filings with accurate information, AFIDA empowers USDA to monitor compliance with this law and assess civil penalties against foreign investors who fail to comply with the reporting obligations.
In recent years, AFIDA has drawn criticism from policymakers and industry observers. Some argue that AFIDA’s voluntary reporting system likely results in under-reporting of applicable transactions. Further, even though USDA can assess penalties against violators, USDA seldom issues fines and has done so with decreased frequency over the past several years, even as such investments have tripled during the same period.
Critics have also argued that AFIDA’s forms don’t capture critical information about foreign investors, as they do not account for the structures through which sophisticated investors acquire interests in U.S. agricultural land. Since AFIDA’s inception, ownership structures for agricultural investments have become increasingly complex, with tiers of privately held limited liability companies, partnerships or other corporate entities, and, as a result, foreign persons often hold an indirect and remote interest in the actual land itself. The current AFIDA disclosure form, however, often does not capture the identity or citizenship of the ultimate foreign owner. Furthermore, AFIDA’s provisions requiring disclosure of interests in U.S. farmland held by foreign persons is difficult to apply in practice; determining whether a foreign person (often a passive and remote limited partner) has “significant interest or substantial control” over an entity that owns U.S. farmland can be challenging when dealing with a complex and multilayered ownership and governance structure.
Anecdotes abound regarding U.S. farmland transactions involving known foreign investors with no corresponding AFIDA filings. These outcomes could be the result of investors flouting the law, the current forms failing to capture relevant information on modern agricultural transactions, or sophisticated investors finding current rules to not be administrable or clearly applicable to their structure and operations. Many doubt the current self-reporting regime and its forms capture the true scope of foreign investment in U.S. farmland.
Congress has seen numerous legislative proposals addressing AFIDA since 2020, many of which focus on increasing reporting and transparency. The Consolidated Appropriations Act for the Fiscal Year of 2023 (2023 Act), which was enacted in December 2022, requires the Secretary of Agriculture to create a public database containing information related to foreign agricultural investments. The Secretary is required to institute a “streamlined process for electronic submissions and retention” of AFIDA filings so such filings, subject to privacy restrictions, are searchable based on the citizenship of individual foreign investors and the principal place of business and corporate registration for foreign entities. The 2023 Act also requires the Secretary to brief Congress on trends in foreign ownership of U.S. agricultural land and the impact on family farms, rural communities, and the domestic food supply. The proposed 2024 appropriations bill for USDA (2024 Bill) builds on the 2023 Act; a report accompanying the 2024 Bill clarifies that $1 million is intended for use creating the public database required under the 2023 Act.
Other congressional proposals focus on expanding AFIDA’s scope and efficacy. Recent bills would increase monetary penalties for failing to make required filings, expand or clarify the scope of those required to file, and prevent foreign investors from participating in government-sponsored programs and subsidies. Another proposal would expand the scope of indirect owners required to make a filing by changing the qualifying language from a foreign investor with “significant interest or substantial control” to such a person with “not less than a 25 percent interest or not less than 25 percent control.”
Looking beyond modifications to AFIDA, legislators have also proposed banning certain foreign persons, foreign governments or foreign entities from owning agricultural land in the U.S. In a proposed 2022 appropriations bill for the USDA (which did not pass in such form), legislators tried to give the secretary broad discretion to “take such actions as may be necessary to prohibit the purchase of agricultural land located in the United States by companies owned, in full or in part, by the People’s Republic of China.” Another proposal would ban individuals from certain “prohibited countries,” including China, Russia, Iran and North Korea, from owning U.S. agricultural land or agricultural companies by prohibiting any merger or acquisition that could result in the control of a U.S. agricultural company. Some proposals have gone further to prohibit specific foreign investors, such as Chinese nationals, from owning any real property in the United States, echoing recently enacted legislation in Florida.
Legislators also have attempted to regulate foreign investment in agriculture through the Defense Production Act of 1950 and the Committee on Foreign Investment in the United States (CFIUS).
In September 2022, President Biden issued Executive Order 14083, which directed CFIUS to consider a covered transaction’s impact on supply chains, including “elements of the agricultural industrial base that have implications for food security.” Since then, several bills have been introduced expanding either membership on CFIUS to include the Secretary of Agriculture or the scope of CFIUS’s review to cover agricultural businesses and related supply chains.
While the federal government has yet to enact major changes, the current federal regulatory framework governing foreign investment in U.S. farmland is being scrutinized by lawmakers and may be subject to change in the coming years. State legislatures have been quicker to implement reforms and have taken steps to regulate and ban certain types of foreign investment in the agricultural space and, in some states such as Florida, the entire real estate sector. Institutional investors and asset managers who hold or manage U.S. farmland will need to monitor the federal government and state legislatures as policymakers rethink how capital flows globally and whether more significant restrictions around foreign investment in U.S. farmland are in the national interest.
Effie George Floyd, Michael Clark and Sarah Clemens are real estate attorneys at Ropes & Gray LLP.