FAQs
What are the first steps?
Interested credit unions complete a questionnaire that includes information about their owned operating real estate. We will review the information and advise your credit union about its options. We offer a range of sale prices and associated rents to meet your individual business objectives, recognizing that many credit unions will opt for less than maximum sale prices in order to obtain less than maximum rents. Each transaction is unique, but generally the time for completion will be three to four months. We use standardized documents to simplify and expedite the process, keeping your transaction costs to a minimum.
If we sell our locations and lease them back, aren’t we at risk of losing them to competitors down the road?
Not really. The initial lease term is likely to be 15 to 20 years. Depending on the useful life of the building, you may structure the lease to include one or more extension options (at then fair market rent), for three to five years each. You can then down the road decide to exercise the options or not based on then-existing circumstances. So, you will not risk loss of desired locations for 25 or 30 years, and at that time you can as to each location assess your preference to negotiate a new lease or repurchase of the location, or walk away as your branch network evolves in response to market forces and other developments.
Sale-leasebacks used to have the advantage of removing leased locations from your balance sheet, so that the rent did not appear as a long term liability. That’s no longer true, so wouldn’t a sale-leaseback increase my Credit Union’s liabilities and thereby reduce its net worth?
No; on a net basis, a sale-leaseback will increase your net worth/capital ratio by bringing onto your balance sheet the gain from the sale, boosting your cash and equity/net worth accounts. While your stated liabilities will be increased by the present value of the fixed rent for the initial lease term, that new liability will be mostly or fully offset by a new type of accounting asset – the value of the “right to use” the leased property. So, the bottom line is that a sale leaseback will strengthen your balance sheet overall, in many cases materially.
Isn’t my credit union better off owning our operating real estate?
Real estate assets on your balance sheet generally increase in value while their carrying balances decline, opening a window of gain for you to harvest. Recent changes to accounting rules allow the entire gain realized from a sale – leaseback transaction to be recorded by the seller-credit union, tax-free, in the year of sale, rather than having to be recognized on a deferred basis ratably over the entire initial term of the lease, as before. Further, changes made to federal tax laws in late 2017 include more generous depreciation deductions and lower effective tax rates for real estate investors, neither of which changes benefit tax-exempt credit unions owning real estate. However, those changes do benefit taxable investors in commercial real estate, making commercial real estate a more valuable investment class and sale-leasebacks a more compelling choice for credit unions with significant operating real estate holdings.
If we sell our offices, what kind of lease terms can we expect?
Depending on the remaining useful life of the properties, an initial lease term of around 20 years, with one or more extension options of five years each. Likely, the lease will be “triple-net,” allowing your credit union to maintain control of all operating and maintenance arrangements and thereby directly control costs. This means you maintain vendor management/information security, quality control of your facilities and manage your direct costs – costs your credit union already bears as the owner of the property. The annual lease cost can be determined by the credit union – with higher annual rents resulting in a higher sale prices and lower annual rents resulting in a lower sale prices, all within a reasonable range of fair market values.
Do we need to get an appraisal of our owned properties?
Doing so is highly advisable as a matter of best management practices, and is in accordance with NCUA guidance on proper practices for a sale-leaseback transaction. While appraisals are appropriate, there is no need to conduct an auction of your properties or to engage a broker to market them publicly, unless your board of directors determines that such procedures are indicated and justify the additional effort, publicity and cost, in which case CURES likely is not the best choice for you as we specialize in negotiated private transactions consistent with appraised values.
What are the legal rules for federal and state-chartered credit unions?
Federal credit unions can engage in sale-leasebacks under guidance provided by NCUA in IRPS-81-7. For state charters, the rules will vary; you should consult your regulatory compliance attorney, and in specific cases our attorneys are happy to discuss the issue with your counsel.
Can a Credit Union, its officers, directors or other affiliates such as a CUSO owned by the Credit Union, invest in the transaction to own part of the buyer/landlord of its properties?
A Credit Union and its own CUSO cannot invest in the buyer-landlord. In order to account for the transaction as an actual sale of the property, rather than as a loan secured by the property, neither the Credit Union nor its CUSO can be an owner of the buyer – you can’t book profit on a sale of your property to yourself.
Credit Union officials can in theory co-invest in their own sale-leasebacks, but it raises conflict of interest and regulatory compliance concerns (see NCUA IRPS 81-7 and local rules for any state chartered Credit Unions). For that and other reasons, our business model relies on pre-arranged private equity, which facilitates simple, certain and prompt transactions at a favorable price.
Can the Credit Union or its CUSO provide all or part of the mortgage financing for a sale-leaseback of its properties?
In theory, yes, although depending on the degree of leverage self-financing on the debt side can jeopardize the ability to account for the transaction as a bona fide sale. Beyond avoiding those accounting issues, our business model involves pre-arranged external debt because it allows for prompt and certain closings, and also because we employ leverage ratios above what some Credit Unions would provide, allowing CURES to offer more attractive deal pricing. Finally, as with Credit Union equity self-financing, having a Credit Union provide the debt financing for a sale-leaseback of its own assets risks at least the appearance of a conflict of interest, calling into question whether the principal motivation is to sell the properties at a favorable price or simply to book a substantial mortgage loan.
Can Credit Unions and/or their affiliates invest in and/or lend to other sale-leaseback transactions.
For the reasons noted above, CURES relies on pre-arranged equity and debt to price and close transactions. Credit Unions interested in providing equity and/or debt capital to sale-leasebacks of other Credit Unions may have the ability to do so directly or through CUSOs managed by other institutions, subject to compliance with applicable regulatory requirements, including those intended to limit the ability of Credit Unions to make and hold passive equity investments in commercial real estate unrelated to their operations. For more information about such opportunities, you can contact NACUSO, the National Association of Credit Union Service Organizations, at www.nacuso.org.