Regulatory Bounds of Owning Real Estate

As the consolidation of the credit union community continues, the number of credit unions declines steadily even as the remaining institutions move forward with increased asset size, growth in membership, and intensification of their span and complexity of operations.

These dynamics, in combination with other factors, have led to increases in the acquisition and possession of real estate assets. In response to this trend and in keeping with its aim to simplify the regulatory structure in to this area, the National Credit Union Administration in October 2015 promulgated a highly modified rule in lieu of its “fixed asset rule.”

The policy codified in NCUA’s Rules and Regulations at §701.36, “Federal credit occupancy planning, and disposal of acquired and abandoned premises,” applies solely to federally chartered credit unions and addresses only real estate ownership. Unlike the policy it replaces, this rule does not apply limitations concerning other fixed assets.

As credit unions increase their holdings in real estate, it is essential to be mindful of NCUA’s policy and observe both its objective and subjective elements. Each institution must have a road map that takes it to full occupancy of the property for its continued ownership or obtains the requisite NCUA authorizations to maintain its property interests.

Accompanying this new rule, an NCUA Supervisory Letter, SL No. 15-03, was issued on Oct. 1, 2015. SL No. 15-03 provides a general statement of NCUA’s supervisory expectations relating to real estate acquisitions that a credit union holds or intends to acquire. These prudential operating principles described with NCUA’s publication of the final rule require demonstrative evidence that an institution has:

“...conduct[ed] prudent planning and analysis with respect to fixed assets acquisitions, can afford any such acquisitions, and properly manages any ongoing risk to its earnings and capital....” and,

 “...demonstrate[d] appropriate due diligence, ongoing board and management oversight, and prudent financial analysis to ensure the FCU can afford any impact on earnings and net worth levels caused by its purchase of fixed assets.”

The ownership of real property (a building or land) from a regulatory perspective presents a continuum of five situations:

1. A credit union has acquired and fully occupies a building for authorized operational needs. This means that the organization “uses the space on a full-time basis.” Under this circumstance, management and the board must be continually assessing the prudential factors, as articulated previously, that may impact the credit union.
2. A credit union has purchased a building and partially occupies it. In this instance, three factors are described at §701.36(b) comprising the definition of the phrase “partially occupy,” one of which requires that the use of the property is “sufficient to show that the federal credit union will fully occupy the premises within a reasonable time.”
3. A credit union acquires a building for use in the future and does not occupy any space in it. “If a federal credit union acquires premises for future expansion and does not fully occupy them within one year, it must have a board resolution in place by the end of that year with definitive plans for full occupation.”  Moreover, the rule requires the institution have the plan available for NCUA inspection.
4. A credit union holds unimproved property for future expansion. In this instance, §701.36(c)(2) requires that the institution must “...partially occupy [the property] within a reasonable period, but no later than six years after the date of the acquisition.” Notably, the latter policy is amenable to waiver by NCUA.
5. A credit union holds either a building or land that it has no plans to use in carrying out its operations. Subject to obtaining an NCUA waiver, an institution “must seek fair market value for the property, and record its efforts to dispose of abandoned premises. After premises have been abandoned for four years, the federal credit union must publically advertise the property for sale. The federal credit union must complete the sale within five years of abandonment.”

The acquisition of real estate, whether through purchase or lease for a year or longer, also has joined to it certain conflict of interest rules. These are delineated at §701.36(d).  The bottom line is that transactions with credit union officials or their immediate family members, whether directly or through other channels in which such persons might be associated, are prohibited unless a waiver is granted by NCUA.

To recap, the regulation of “fixed assets” has been limited by this rule to real estate holdings owned by federal credit unions. The strictures are clear, unequivocal and based on commonsense principle: Buy what you can afford and need. Moreover, NCUA has provided ample flexibility within the rule to enable continued ownership beyond the circumstances it lays out. Illustratively, should a credit union need additional time than permitted by NCUA's rule to partially occupy space it has acquired or dispose of property it does not need, it can apply to the regulator for a waiver of the requirements.

Adapting the old saying that “you can’t tell the players without a program” when attending a sporting event, a federal credit union can’t own real estate without knowing the guiding rules.

Stephen A.J. Eisenberg is of counsel with CU Counsel, PLLC, Washington, D.C.