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The sale-leaseback business has certainly evolved since the first transaction in the 1950s, however the major benefits for the seller/lessee still remain today. Roughly 60% of corporate real estate in the United States is leased (versus owned), typically for reasons such as tax and accounting advantages, operational flexibility and a lower cost of capital. While credit unions can benefit from all of the aforementioned items, there is one major advantage that is specific to the credit union industry.
By accessing cash tied up in the brick and mortar, the seller/lessee can use that additional capital to invest in member services, technology upgrades, loans or other growth initiatives. The proceeds can also improve a credit union’s balance sheet by providing additional liquidity while maintaining capital ratios. A properly structured sale-leaseback provides the seller a pool of capital at 100% of the fair market value for their real estate without having to go to the debt market. New debt means a lower loan to value with new liabilities and worsening capital ratios on the balance sheet.
What is unique to a credit union sale-leaseback is that credit unions are typically tax-exempt entities. As such, the investor/buyer can claim depreciation deductions on the acquired property, which is an industry standard. While credit unions do not benefit directly from this depreciation (due to their tax-exempt status), the buyer’s ability to claim these deductions can lead to a lower cost of capital/rent for the credit union. In other words, the investors’ benefit can lead to lower rents for the credit union. But this is not the main benefit.
In a recent transaction, a leading credit union sold and leased back its corporate headquarters under a 15-year net lease arrangement structured by the oldest firm specializing in corporate sale-leasebacks, United Trust Fund LLC and CRIC2 Holdings LLC. The transaction was valued at $22,500,000 and the lease was structured as an operating lease for the numerous benefits it afforded the seller/tenant. The credit union wished to remain anonymous, which is a fairly common request within the sale-leaseback industry. “We maintain a fiduciary relationship with our clients and confidentiality is a key component. However, the most important aspect in dealing with the credit union community is for them to realize all of the benefits associated with monetizing their real estate,” UTF President Fred Berliner said.
This sale-leaseback structure provided the credit union with several new opportunities. First was its ability to recoup the capital the credit union had spent the year before making renovations to upgrade its headquarters. Second was that the excess funds enabled the seller to create an additional pool of capital for customers’ loans without reducing its capital ratios. Third, the sale-leaseback enabled the credit union to spend part of the sale-leaseback proceeds on fintech upgrades for mobile banking and cybersecurity systems without taking the funds out of pocket.
The most desirable aspect, however, was that the credit union made a loan to the buyer on its own headquarters. Traditionally, this structure would not qualify for favorable accounting treatment, thereby eliminating the off-balance sheet benefits. The Financial Accounting Standards Board (FASB) and the relevant accounting rules do not permit what is referred to as “continuing involvement,” by virtue of a loan made from the seller to the buyer, however, this is not the case with credit unions.
Why Is This Good for the Credit Union?
For credit unions, making a loan or loans on their own properties is permitted and a significant value-added benefit. In the example discussed above, one of the most beneficial aspects of this sale-leaseback was that the credit union was also the lender. This creative structure in which the credit union provided a loan to the buyer as part of the purchase allowed the credit union to book an essentially “risk-free” loan because the credit union's own rental payments from the sale-leaseback went directly to pay the interest on the credit union’s loan. A credit union that pursues a sale-leaseback can also benefit from going to the secondary market to sell all or parts of its loan. The credit union can obtain a positive arbitrage between what the interest rate it charged the buyer and what it can sell the loan for to other member credit unions that want to participate in booking a “risk-free” loan.
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