A pair of recent interpretive letters issued by the Office of the Comptroller of the Currency confirming the permissibility of two real estate projects by Bank of America and PNC have engendered a surprising amount of media attention.
The Bank of America letter confirmed the permissibility of the establishment of a hotel on bank premises to provide lodging for the bank’s out-of-area visitors. The PNC letter confirmed that the bank could construct, as part of its existing headquarters complex, a mixed use commercial/residential building which would include offices, stores, restaurants, a hotel, and condominiums.
These letters have been widely misconstrued in the press as an expansion of the real estate powers of banks. Predictably, the real estate brokerage industry has also rung the alarm that the letters are yet another step by the bank regulators towards eventually permitting banks to act as real estate brokers — although it is difficult to see how confirming that banks have flexibility in building their premises could serve as a precedent for permitting them to sell houses.
National banks have been legally authorized by long-standing statute, case law, and regulatory guidance to utilize any unused real estate that they hold as bank premises as they see fit, provided they act in good faith and not in a speculative manner. The National Bank Act permits national banks to acquire real estate, provided that it is used as premises or security for a loan or is acquired through foreclosure.
The courts have recognized as early as 1902 (Brown v. Schleier) that limitations on the ability of banks to own real property “ought not be construed in such a way as to compel a national bank, when it acquires real property for a legitimate purpose, to deal with it otherwise than a prudent landowner would ordinarily deal with such property.”
Based on this legal foundation, the rule of thumb for a number of banks for many years has been that it is permissible to construct bank premises and sell, rent, or otherwise monetize any excess premises as long as at least 20% of the facility is used by the bank — although there is long-standing precedent for numbers lower than 20%.
Hence, the Bank of America and PNC letters are hardly expansionary. To the contrary, they are quite conservative, in that Bank of America projects that it will use more than 50% of the occupied rooms of its hotel and PNC projects that it will occupy 22% of the office and hotel space of its building.
Why have the Bank of America and PNC letters attracted such attention? There are at least four reasons.
First, with the steady pace of industry consolidation, banks have reached unprecedented size. Bank of America, Citigroup, and JPMorgan Chase each has over $1 trillion in assets and over 100,000 employees. With increased size comes an increased need for headquarters space, which in turn propels more ambitious projects that comply with the 20% rule but are nevertheless more elaborate.
Second, the development of mixed-use real estate projects in urban areas has been a relatively recent phenomenon, whether as part of the same building, as in the case of PNC, or as part of an integrated complex, as in the case of Bank of America.
Third, the real estate brokerage industry has zealously resisted bank regulators’ efforts to let banks act as real estate brokers and has protested, quickly and loudly, efforts real or misconstrued to expand the real estate-related powers of banks.
Lastly, when bank regulators do in fact expand bank powers, they tend to minimize the significance of their rulings in order to lessen political opposition. As a result, statements by the OCC that these two interpretive letters do not break new ground have been largely dismissed — despite the fact that they are completely accurate.
