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Proposed rule changes at both the state’s banking regulator and the federal credit union regulator could mean that credit unions may be able to own and develop real estate as an investment.
At the federal level, the National Credit Union Administration (NCUA) has proposed a rule that would tweak the way a federal credit union may occupy a piece of property. Currently, a federal credit union must plan for and eventually achieve full occupation of any premises it acquires. The NCUA has proposed that federal credit unions be allowed to occupy just half of property they acquire – and that 50 percent can include space used by a credit union service organization (CUSO), too.
At the state level, the Division of Banks is considering an amendment to Massachusetts’ rules concerning state-chartered credit unions’ parity with federally-chartered credit unions.
“The majority of the changes are of a streamlining nature,” said Chris Goetcheus, spokesman for the Division of Banks. “Where once credit unions would have to come before the Division of Banks and get approval, now they can give the division notice for certain actions.”
Steven Eimert, a partner with Boston-based Sherin and Lodgen, zeroed in on a provision in the proposed state rules that would allow state-chartered credit unions to partner with non-credit union entities to form CUSOs, something that federal credit unions already have the power to do. He said those two changes could also open up a new world of opportunity for Massachusetts-chartered credit unions.
“When you combine [the NCUA proposal] with the change in Massachusetts, Massachusetts- chartered credit unions are very close to having the power to invest in commercial real estate in the same way NCUA proposes for federal charters,” Eimert told Banker & Tradesman. “You could partner with a real estate developer and buy that property through a CUSO or a subsidiary of a CUSO and now you are, in a limited way, in the real estate development business.”
Eimert said the final piece of the legal puzzle at the state level would be for the Division of Banks to amend its parity rule to grant state chartered credit unions the same property ownership rights the NCUA proposes to give federal credit unions.
As an example, a credit union could purchase a small strip mall through a controlled CUSO in which a developer was a partner, occupy half of that property with its own office and that of any controlled CUSO, and then lease out and manage the rest of it, he said.
The NCUA cited regulatory relief as the reasoning behind the new proposal, and Eimert’s comments seemed to echo that.
“Up until now federal credit unions couldn’t look at all sorts of locations that made operational and financial sense,” Eimert said. “They could either lease part of that sensible location or they could find a standalone property, but would have to occupy it all within four or five years.”
The state banking division did not comment directly on the matter of Massachusetts credit unions investing in commercial real estate properties.
“Whatever results from that, we will subsequently review all powers granted at the federal level as they are approved and implemented, including those proposed by the NCUA,” Goetcheus said. “Once that regulation is approved, we can review what they’ve changed and we have the ability to go back and do another revision of the [state’s] regulation.”
Banks Keep Mum For Now
While the Massachusetts Bankers Association did not comment directly on the subject of credit unions investing in commercial properties in this way, the association did submit a comment letter to the Division of Banks concerning the proposed amendments. In particular, the association expressed concerns about credit unions seeking greater bank-like powers – such as the authority to engage in certain derivatives activities – without giving up their tax-exempt status.
And banks don’t have the power to invest in commercial real estate — except in very limited circumstances.
According to Kenneth F. Ehrlich, a partner at Boston-based Nutter McClennen & Fish, any real estate owned by a bank must be, in general, bank premises or OREO (that is, real estate seized by a bank in a foreclosure proceeding). With respect to a bank’s authority to invest in bank premises, banks can buy property they don’t fully occupy as long as there is a good faith expectation the bank will occupy that real estate over a reasonably short period of time, he said. Unused space may be rented out so value is realized.
Non-member banks – regulated by the FDIC and not the Federal Reserve – that do not have a bank holding company, can invest in and develop real estate under authority in FDIC regulations, but those rules include numerous firewalls and other restrictions and FDIC approval must be obtained.
Further, he said, “If the Federal Reserve is the primary regulator or if there’s a holding company, the Fed has an absolute policy against banks owning real estate for speculative, investment purposes.”
Eimert, meanwhile, doesn’t think that credit unions will get into large-scale commercial development on the ownership side. Instead, he thinks these rule changes will at least allow credit unions, particularly larger credit unions, greater flexibility in choosing their locations, and should also allow them to get financially creative in structuring mini-developments with developer partners.
“Credit unions, by their nature, are very conservative,” Eimert said. “I think it will take some time for credit unions to get their head around the opportunity this provides. But when they do, I think you’ll see them dip their toe in this and start exercising these expanded investment and partnering authorities.”
The NCUA is accepting comments on its proposed rule until June 27.
