With declining net interest margins, rising operating expenses and unprecedented merger and acquisition activity, credit unions face a challenging landscape to remain competitive.
Converting all or a portion of corporate-owned properties into a sale-leaseback offers credit unions the ability to transform non-earning corporate real estate assets into earning assets.
While Bank of America, Wachovia and many other banks have engaged in significant sale-leaseback transactions in the past years, credit unions have been overlooked by the institutional investors.
Credit Unions Have Fewer Options
Unlike publicly traded banks, credit unions have limited options for raising capital for growth, expansion and merger and acquisition activity.
Ironically, credit unions typically have a preference for corporate real estate ownership when their core business is not owning or developing real estate.
Owned real estate represents a necessary but illiquid asset for institutions in an industry that prizes liquidity.
When properly structured, a sale leaseback allows the credit union to access appreciation of its real estate while retaining occupancy and control of the properties.
While sale leasebacks transactions have been around since the early 1950s, what has changed in the past several years is the influx of institutional, flexible capital into the commercial real estate sector. Now institutional investors and specialty REITs are focused on offering attractive acquisition and lease terms to credit unions.
A Straightforward Structure
The sale leaseback structure is straightforward. A credit union sells the property to an investor. The credit union then agrees to lease the property back from the investor pursuant to a long-term lease, typically with a term of 10 to 20 years.
The credit union then agrees to pay a series of rent and operating expense payments to maintain the properties.
The lease is structured as an operating lease that is FASB 13 and 98 compliant and the property is removed from the balance sheet of the credit union.
Credit unions enjoy several benefits by entering into a sale leaseback transaction such as:
* Obtaining cash to fund reinvestment in earning assets, repayment of debt or M&A activity.
* Access to appreciation in real estate while maintaining occupancy of the property.
* Focusing on core operations rather than managing real estate.
* Gain on sale of real estate is tax-free for federal and state credit unions and 100% of net proceeds are available for reinvestment.
* Improving capital and financial ratios.
There are numerous benefits of a sale leaseback transaction, so why have credit unions resisted sale leasebacks in the past?
Often credit unions are concerned about a loss of control which today can be easily addressed by giving the credit union multiple renewal option and a first-right-of refusal repurchase options at fair market value at the end of the lease term.
To determine if a sale leaseback transaction is right for your credit union, consider whether you have the following:
* Headquarter, operation centers and branches with a net book value of at least $5 million.
* Need for liquidity to fund strategic initiatives.
* Potential gains on the properties you own.
* Desire to focus on core operations.
* Need to expand branch network.
If you answered yes to any of the above questions, you should consider carefully evaluating the merits of a sale leaseback transaction for your credit union.
Vincent E. Pellerito, Chief Executive Officer of Los Angeles, California based National Financial Realty, Inc. He can be reached at 310-791-7722.
