And When It’s Over – A Strategy to Boost Credit Union Earnings and Capital

By Steven Eimert & Edward Lopes

Whether it’s in a month or two, or perhaps a little longer, the worst of the COVID-19 crisis will pass, the routine of daily life will resume, and credit unions will be among America’s key businesses looking to jump start their own and their communities’ recovery.  Conditions then are likely to include historically low interest rates driven by a combination of various government fiscal and monetary intervention and increased deposits as members burned by a severe decline in stock prices and continuing volatility move much of their financial assets into insured deposits.  At the same time, loan demand is likely to surge, reflecting interim emergency credits and longer-term business recovery efforts. 

In such an environment, where earnings and capital will be under stress, how can a fundamentally sound credit union tap non-lending sources of liquidity, earnings and capital?  One innovative, yet time –tested tool worth serious consideration is a sale-leaseback of the institution’s operating real estate.  Historically used by banks on a large scale to generate liquidity and earnings, sale-leasebacks make even more financial sense for tax-exempt credit unions, and recent accounting and tax law changes make such transactions more attractive than ever for both credit unions anxious to strengthen their finances and investors eager to acquire commercial properties occupied by premium credit tenants such as credit unions.

A sale-leaseback at its core is simple - owned facilities are sold for a profit and leased back so as to permit uninterrupted operations.  When such a transaction involves a credit union, it creates synergistic value by (1) placing the real estate in the hands of an investor who can utilize recently enhanced tax benefits from real estate ownership (including expanded depreciation writeoffs and lower effective tax rates) that the non-taxable credit union cannot enjoy, and (2) allowing the credit union to receive the resulting profit and liquidity tax-free, while under new accounting rules recognizing the entire gain in the year of sale.  Sale-leasebacks also can enable credit unions with excess space to downsize their footprint by leasing back less than the entire facility or subleasing out the unneeded space.

The critical factor in determining the economic value and income statement consequences of a potential sale-leaseback is the amount of unrealized appreciation in the properties – an unrecognized asset otherwise trapped on your books.  That can be determined by reference to the adjusted book value of the properties on your balance sheet and an estimate of value from an independent expert (at some point, formal appraisals will be needed, but at the outset a less formal opinion of value should suffice).  Armed with an estimate of the total gain from the transaction, your internal finance staff or accountants can develop a preliminary pro forma P&L and balance sheet analysis, including scenarios where all properties are sold in a single transaction or instead in groups phased over time to result in a more sustainable, predictable boost to earnings and capital. 

With this preliminary financial data in hand, a CEO will be in a position to engage with their board to decide if it makes sense to solicit actual deal proposals, which can be done with or without a commercial broker depending upon the size and complexity of the potential transaction and the internal commercial real estate expertise available to senior credit union management. 

Credit unions evaluating a sale-leaseback must consider accounting rules and consequences in deciding whether to pursue and how to structure the deal. The accounting rules for sale-leasebacks include bona fide, commercially reasonable terms, so that the investor-purchaser has made a meaningful investment in the property.  And the credit union-seller maintains no continuing economic involvement in the properties other than its rights under the lease.  The credit union can’t retain an option to buy back the property at the end of the lease, and likewise the purchaser can’t have the right to force the credit union to buy it back.  Less formal arrangements giving the credit union first crack at a buyback, such as a right of first refusal or right of first offer, are in theory permissible, if properly structured and acceptable to the investor-purchaser. 

NCUA permits federal credit unions to engage in sale-leasebacks, subject to certain requirements (see IRPS 81-7 (9/11/81)), while state charters must look to their local rules to ensure compliance.  Given the prevalence of state parity rules, including many with full and automatic parity or notice-only procedures, most state charters will be able to engage in sale-leasebacks, and state credit unions should very early in the sale-leaseback diligence process determine the rules that apply to them.

Remember that unlike a sale of properties where you vacate the premises, sale-leasebacks are operationally invisible.  The credit union stays put and remains in control of vendors and facility operating costs such as insurance and cleaning services.  Importantly, a credit union engaging in a sale-leaseback will in any event receive a long (typically, 20 or more years) and secure lease term, often with additional extension options.

There is light at the end of this tunnel, and a well-designed and executed sale-leaseback may be part of the solution.  To learn more, go to