Taking advantage of a controversial new rule, NationsBank has asked the Office of the Comptroller of the Currency for permission to enter the real estate development business.
The lead bank of Charlotte, N.C.-based NationsBank Corp. also proposed financing real estate leasing. The applications, released Tuesday, are the first filed under the agency's so-called "op-sub" rule.
As envisioned under the rule, NationsBank would conduct both businesses in direct operating subsidiaries, rather than holding company units.
Currently, banks are banned from the real estate development business and may engage in lease financing only through holding company affiliates.
The operating subsidiary rule, effective Dec. 31, is designed to let national bank units engage in activities off limits for their parents. The rule has been trumpeted as a route for banks to underwrite insurance and securities directly, but most observers expected the first requests to be for less-controversial activities, such as expanded data processing.
NationsBank's request to engage in real estate development, a risky business that led to massive losses in the thrift industry, came as a surprise to some observers.
"That request certainly pushes the envelope," said Robert Litan, director of economic studies the Brookings Institution.
"There is a considerable stigma associated with it due to its unique ability to entice people to lose large amounts of money very quickly," agreed Karen Shaw Petrou, president of ISD/Shaw Inc.
NationsBank officials declined to comment on their requests, which were both filed March 26. Perhaps anticipating criticism, the real estate development request is quite narrow.
According to the application, NationsBank would establish Tryon Development Partners as a subsidiary to build a condominium complex.
The $13 million building, which would house approximately 45 condo units, would be adjacent to a NationsBank office currently under construction in Charlotte. The request covers this specific project only. While NationsBank plans to develop similar projects, the application said, it will ask the OCC for permission for each development.
Contrary to the consultants' reactions, bankers downplayed the novelty of the applications.
"This is a very limited request, but it is a logical development of the normal business of banking," said Lawrence Baxter, senior vice president of Wachovia Corp.
In the second application, NationsBank would establish a direct subsidiary to buy real estate and lease it. According to the document, the subsidiary would buy property only after identifying customers ready to lease it.
National banks may directly acquire and lease personal property, such as automobiles, but are generally banned from doing so with real estate. Only holding company units may engage in this business.
James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association, said institutions should be able to decide where a business makes the most sense: in a bank subsidiary or as a unit of the holding company.
"All we want is a choice," he said.
While she would not comment specifically on the NationsBank applications, OCC Chief Counsel Julie L. Williams said the op-sub rule gives banks the opportunity to structure their activities more efficiently in ways that do not pose a threat to safety and soundness.
"These applications reflect the process under the rule that enables us to give a case-by-case review of activities related to banking and represent the potential for additional flexibility," she said.
That said, both proposed NationsBank subsidiaries would function under several restrictions.
According to the applications, all investments, loans, and advances related to the real estate development unit could not exceed 2% of the bank's Tier 1 capital. The lease financing subsidiary's equity interest in real estate would be limited to 5% of NationsBank's Tier 1 capital.
Under the op-sub rule, if the Comptroller's Office has not approved the activity for national banks, the application must be published for comment in the Federal Register. The NationsBank applications will be published Friday, OCC officials said. The comment period will last 30 days.
