Nov 06, 2006
In This Issue
National and State member and nonmember banks, as well as bank holding companies, may wish to read the most recent Office of the Comptroller of the Currency ("OCC") interpretive letter on national bank real estate investment powers. Interpretive Letter #1072 may be accessed at: http://www.occ.treas.gov/interp/oct06/int1072.pdf.
This interpretive letter allows a bank to remodel and expand an old branch and, additionally, add a small retail complex on extra space on the property pursuant to the long-standing "bank premises" authority to own real estate.
The OCC was criticized earlier this year when it (i) authorized bank real estate investments in a hotel for use by its directors and out-of-area employees; and (ii) approved a wind farm project financing structure where, in order to secure tax credits, the national bank took an interest in a limited liability company which owned the wind farm leaseholds and easement interests. While real estate development by banks is first and foremost a political issue between financial institutions and real estate developers and realtors, the downfall of many savings and loans and banks in the 80s and early 90s was linked to expanded real estate development powers. The Gramm-Leach-Bliley Act specifically precluded the consideration of expanded real estate development authority for "financial holding companies" for at least an initial five year period, and any legislative expansion of bank real estate development powers still seems politically very unlikely.
Some commentators have said Interpretive Letter #1072 does not break new ground. Banks for years have been allowed to acquire and develop property to be used "substantially" for bank use and to lease out excess space as a source of income. State banks can find the California version of the so-called "bank premises" authority to own real estate for bank use, including "other space which may be let as a source of income", in Financial Code Section 750. The FDIC and the Federal Reserve have similar policies on bank premises ownership as the federal supervisors of State banks. Bank Holding Company Act Section 4(c)(1)(A) authorizes holding and operating properties "used wholly or substantially" for banking operations and property acquired for such future use. Definitions of what qualifies as "substantially" have changed over time and from project to project and sometimes from regulator to regulator. Generally, however, commitments to initially occupy at least 10% to 20%, with plans to later occupy 25% or more, and preferably 50%, of the property over a reasonably foreseeable period of time have been acceptable premises investment proposals. Occupants may include subsidiaries of the bank and non-bank subsidiaries of bank holding company owners of real estate owned and managed for bank use.
Noteworthy in Interpretive Letter No. 1072 is that the bank ground-leased the property to the developer in return for 40 years of fee income and then leased the remodeled branch rent free. The interpretive letter also noted that the bank did not finance the construction, although that would seem to be possible if properly structured.
This option for developing property "in good faith" for bank premises use may be of interest to banks with older branches on larger sites that now may show promise if remodeled and expanded to take advantage of additional lease revenue opportunities. As with other bank assets, if the bank or bank holding company should no longer have a banking use for real estate it owns, regulators will expect steps to be taken to dispose of the real estate in a reasonable manner to recover its fair market value.
For questions on this newsletter topic or other bank or bank and financial holding company powers and expansion authority, contact Mick Grasmick at Manatt, Phelps & Phillips, LLP, in Los Angeles at (310) 312-4369.
T.J. Mick Grasmick Mr. Grasmick's practice focuses on mergers and acquisitions, non-banking activities, formation of new banks, interstate and other expansion by banks, bank holding companies and other financial institutions and the requirements and restrictions on expansion of state and federal bank regulatory agencies; bank supervision and examination, and general banking corporate matters and regulatory and legislative developments.
He has performed these services for sellers, acquirors, management and owners of banks in California and for foreign banks and foreign investors.
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T. Hale Boggs
Katerina Hertzog Bohannon
James Edmund Datri
Patrick Del Duca
Paul H. Irving
Richard Maire, Jr.
Matthew S. O'Loughlin
Barrie B. VanBrackle
Steven R. ArnoldPartner
Ellen R. MarshallPartner
Craig D. MillerPartner
Barbara S. PolskyPartner
Harold P. ReichwaldPartner
Charles E. Washburn, Jr.Partner
Donna L. WilsonPartner
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