Strategic Balance Sheet Management for Credit Unions
CU Capital Management is a CUSO that was created alongside credit unions and credit union industry experts to bring unique capital and asset opportunities to credit unions.
CU Capital Management manages a network of CUSOs focused exclusively on sale leasebacks for credit unions including opportunities for credit unions to participate as sellers/lessees, as investors and/or as lenders.
Overview of Opportunities
The unique model created by CU Capital Management allows credit unions to participate in all aspects of the sale leaseback value chain as outlined below.
Credit unions can sell real estate used for operations (headquarters, operations centers, call centers, branches, etc.) and enter into a long-term leaseback of the space while immediately booking a capital gain of the difference between market value and carried value.
Through a CUSO structure, credit unions have the opportunity to invest in sale leaseback transactions by other credit unions. CUSO investors can expect to receive a net annual return of over 5% on their CUSO investment through the safe and reliable income generated by long-term leases to credit union tenants.
Credit unions have the opportunity to lend on sale leaseback transactions by other credit unions, either as the original lead lender or as a purchaser of a loan participation interest. Credit unions will be able to lend under both their Member Business Lending and CUSO lending powers. A diverse array of lending opportunities will exist including variable and fixed rate loans with a range of term lengths .
Sale Leasebacks for Credit Unions
Sale leaseback transactions provide credit unions the opportunity to optimize their balance sheet by unlocking capital through the sale of appreciated assets.
Through CU Capital Management, credit unions can access a turnkey solution to monetize real estate holdings for purposes of growing capital and enhancing reserves, expanding lending and investment capacity and significantly increasing their ability to serve members.
The unique CUSO structure of the CU Capital Management sale leaseback model allows credit unions to invest in and/or lend on similar transactions by other credit unions.
Please contact us to learn more about how a sale leaseback transaction can benefit your credit union today.
Why is now the perfect time to raise capital from a sale/leaseback transaction?The most important reason is that as of 2022, the new FASB Lease Accounting Rules permit credit unions to recognize all the capital upon the closing of the transaction as opposed to spreading the capital recognition over the term of the lease. FASB Rules come and go and there is no guarantee that this rule will be permanent. Credit unions should take advantage of the rule while it is in effect. Prior to the new Lease Accounting Rule being implemented in 2022, sale/leaseback transactions could be helpful to credit unions but were substantially less beneficial than they are today. Real estate prices have never been higher. However, with interest rates rising, stimulus money ebbing from the economy, and economic outlook and demand for office space growing increasingly uncertain, there will be a dampening effect on real estate values. The positive factors remain in alignment now, but they will not last.
Why does a credit union want to give up the equity value in the property if the credit union’s current capital ratios are healthy?Are credit unions in the business of providing better financial services to members or in the business of growing a real estate portfolio? The capital to grow the credit union and improve member services is there for the taking. Capital tied up in real estate value is just that, tied up. It is unavailable for the credit union to access and does not further the mission of the credit union. We are at an inflection point for the future of the credit union industry. If credit unions delay in making the necessary investments to remain competitive, members will find other service providers and at some point it will be too late to get them back. Now is the time for credit unions to use all the resources available to them to better serve current members and bring in new members. Many markets have seen unprecedented growth in real estate values over the last few decades. Credit unions that own real estate have probably benefited from this growth. However, there is absolutely no guarantee these real estate growth rates will continue and credit unions are not in the business of betting on future real estate values. Credit unions should take this opportunity to capitalize on the real estate gains available to them and invest that newly available capital back in the credit union. Well-run, well-capitalized credit union growth rates can and should far exceed the growth rate of real estate values.
Why is it important to sell to and rent from a CUSO buyer?The credit union’s relationship with a long-term landlord is important. In typical sale/leaseback transactions, the property and attached lease are often sold by the original buyer and even subsequently resold, leaving the tenant with no control over who their landlord(s) will be. One credit union that previously engaged in a sale/leaseback transaction with a non-CUSO buyer was so frustrated with their non-CUSO landlord that the credit union decided to buy back the building at a premium. A CUSO buyer intends to hold the property for the duration of the credit union’s tenancy. A CUSO landlord is managed by credit union colleagues and not by strangers. In the event there are any landlord/tenant issues, a credit union tenant is better able to work through those with a CUSO landlord rather than a non-CUSO landlord focused on maximizing profit. In order to have true sale treatment, the selling credit union cannot have a written options to buy back the building throughout the lease or at the end of the lease term. Notwithstanding that, a credit union can make an offer to repurchase the property at any time and a CUSO landlord is more likely to engage in an open and productive discussion around selling back to the credit union at market price if asked to consider it.
Additional QuestionsPlease email firstname.lastname@example.org with any additional questions or to schedule a conversation to discuss sale/leasebacks for credit unions in more detail.
How do we deal with the uncertainty of real property needs in the next ten to twenty years?There is no doubt that how credit union use real property will change. Maybe only a handful of employees have permanent offices. Some employees may work partially from home and have shared offices at the credit union’s location. Maybe there will be a need for office space for CUSOs yet to be formed. Perhaps some space will be dedicated for employee training for one or multiple credit unions. Credit unions may dedicate space for community meeting rooms. However real estate assets are used, real estate will continue to have a role in the evolving credit union business models. A credit union can invest a portion of its gain from a sale/leaseback into reconfiguring their office space or branch networks for a “post-covid” environment.
What are the other advantages of a credit union seller participating in the CU Capital Management Sale/Leaseback Network?Selling credit unions have priority in participating as investors in CUSOs that buy other credit union properties and as originators or loan participants in loans funding the purchase of other credit union properties. Credit union investors that fund CUSO buyers can earn annual returns that are generally projected to be between 5% and 8% which is well above investment instruments permitted under the investment rules. These investment returns are paid in the form of a quarterly dividend with an annual true-up. CU Capital Management has also structured the CUSO Network in a way that provides reasonable liquidity to all CUSO investors should there be a need for a credit union to sell its ownership in the CUSO. As this is a CUSO investment, the limitations in the investment rules do not apply. Lending opportunities to well-capitalized credit unions are also very attractive. The CUSO investments and loans in the CU Capital Management Sale/Leaseback Network are all backed by high-quality real estate and long-term leases to well-capitalized credit unions. In the CU Capital Management Sale/Leaseback Network, credit unions can be sellers/tenants, investors, and/or lenders and there are no non-credit union investors in the CUSOs, thereby allowing all the benefits stay within the credit union industry.
Which credit unions are the best candidates to sell and lease back their property?The credit unions owning property that has been partially or substantially written down (depreciated) on the credit union’s books and/or that has experienced appreciation in fair market value, are the best candidates to sell and lease back their properties. These credit unions will have the most “gain” to apply to capital. However, even a credit union that buys new property can see a gain. Remember that the value of the property to a buyer in a sale/leaseback transaction includes both (1) the fair market value of the property and (2) the value attributed to the long-term lease. We have seen that the value of the long-term lease often bumps the fair market value by 20% to 30%. Thus, if a credit union buys a property for $10 million and then sells it in a sale/leaseback the sales price may be $12 to $13 million depending on the terms of the lease and location of the property, resulting in $2 million to $3 million in new capital to the selling credit union.
How do you get the highest sale price?The property that is sold with a twenty year leaseback is much more valuable to a buyer than just the property alone. The value to a buyer is both the fair market value of the property plus an income stream from the lease that will increase as periodic rent increases kick in. An appraisal of a sale/leaseback should account for the value of the twenty year lease with a highly qualified tenant. Having a lease is that is triple net with the credit union tenant being responsible for all building related costs, including insurance, taxes, routine maintenance, and structural repairs; increases the value of the property. The triple net lease gives the buyer/landlord the assurance that the rental income will not be diminished by unanticipated expenses. While the risk of building related expenses remains with the credit union tenant, the credit union has the advantage of continuing to maintain control over its building’s condition, upkeep and appearance, just as it did when it owned the property. To obtain maximum value, it is also important for the credit union tenant to lease back 100% of the property, with minor subletting generally permissible. Finally, the longer the initial lease term, the higher the sales price. A minimum of ten years is generally required but twenty years tends to be the norm. Options to extend the term are provided to the credit union tenant.
What types of property can a credit union sell and lease back?Credit unions may sell and lease back any real estate that is currently owned and utilized by the credit union. This includes their headquarters building(s), operations center(s) and branch networks. The main consideration is that a credit union must intend to continue to occupy and utilize all (or a significant majority) of the space in order for any given property to be considered for a sale leaseback with the CUSO. Individual branch locations are unlikely to be candidates for a sale/leaseback with the CUSO simply because the transaction size will be too small but are ok when included along with a credit union's office property or as a larger network of the credit union's branches. Overall, the best properties for a sale/leaseback are those that are critical to the operations of the credit union and that are part of its long term growth plan.
Why does a credit union, even a well-capitalized credit union, need more capital?Regulatory Reasons The definition of well-capitalized is evolving upward. NCUA’s risk-based capital rule will require that credit unions have a minimum risk-based capital ratio of 10% as well as a net worth to assets ratio of 7%. If the credit union engages in certain activity as set forth in the NCUA matrix, additional risk-based capital may be needed. Credit unions are required to adopt the new Current Expected Credit Loss (CECL) accounting rules beginning in 2023 which will also result in increased capital requirements. The future is clear. Credit unions will face increased capital requirements from NCUA. Off-Set Risk in Challenging Times We are in a rapidly rising interest rate environment that has not been seen in decades. Managing assets and liabilities will be difficult. Loan demand is declining. Non-interest income from interchange fees and overdraft fees is declining or disappearing. Borrowers are taking on much higher mortgage loan obligations due to the rapid increase in real estate prices. Inflation will adversely impact the ability of borrowers to make loan payments. Recession or not, there will be loan and revenue losses that the credit unions will have to absorb. Increased Need to Invest in People and Technology Resources In order to remain relevant to their members, credit unions have to keep pace with consumer expectations. Fintechs continue to create higher and higher service expectations, such as applying for an unsecured loan on your mobile phone and having it underwritten and funded within a minute. Credit unions have to invest in the people and technology to be competitive in the 21st Century in order to survive. Providing attractive salaries and benefits is critical to attracting and retaining talented employees which in turn will allow credit unions to provide better services and experiences to members.
Can the tenant credit union sublease a portion of the property to others?With the permission of the CUSO landlord and the credit union lenders, a credit union tenant can lease a portion of the building to others. However, as a rule of thumb, a credit union tenant should not expect permission to sublease more than 20% of the building. From a regulatory standpoint, a CUSO can own and lease real property to credit unions and CUSOs but not to third parties. Subletting a minor portion of the property does not change the credit union centric character of the transaction, particularly if the tenant credit union is the master tenant for 100% of the property. For credit unions that believe they need substantially less office space going forward than they currently own and use, there are other solutions available that provide more benefit than trying to sublease a majority of the space or initially only leasing back a minor percentage of the available space. Please contact us for more information.
Why is a sale/leaseback transaction the best way to raise capital quickly?A credit union that sells its operational real estate can immediately book as capital the difference between the sales price and the depreciated carrying value of the real estate. Unlike with secondary capital, there is no obligation to pay back the capital; there is no long, expensive and cumbersome process to apply for approval from the NCUA; and there is no strict business plan that must be followed as a condition of regulatory approval. A credit union can also raise capital organically through net income but this can be slow and is often not enough if a credit union is in need of additional capital for regulatory purposes or growth purposes.
Why does a credit union want to take on a rent payment obligation which will be greater than the amount that is depreciated each year on the property the credit union currently owns?The boost to capital from a sale/leaseback is immediately available to credit unions to hold in reserve or use as they see fit. Credit unions need capital to weather adverse economic times that are developing in front of our eyes. They need capital to grow and take advantage of opportunities. By deploying the additional capital realized in the sales transaction, credit unions will put themselves in position to grow faster. With that growth comes the ability to make additional loans and investments, providing additional income to more than offset the added cost of rent payments.
NACUSO Business Services
CU Capital Management is proud to be the first and only Promotion Partner of NACUSO Business Services, a wholly-owned subsidiary of NACUSO. In establishing this partnership, NACUSO Business Services determined that CU Capital Management's CUSO network and collaborative business model provided uniquely significant value to the credit union industry.
Maps Credit Union
CU Capital Management is proud to have Maps Credit Union, based in Salem, OR as an investor and partner. Maps Credit Union knows firsthand the benefits of sale leasebacks for credit unions, having conducted a sale leaseback of its own administrative building back in 2010 in order to raise capital and enable growth. Maps has since repurchased the property and has grown in size to $1.1B in assets while serving over 71,000 members.
Sale Leaseback Portfolio
Representative credit union sale leasebacks within CU Capital Management's sale leaseback network are below. Please contact us for additional details related to any specific transaction.
News and Resources
A CUSO Funded by 23 Credit Unions Buys Affinity's New Jersey Headquarters
In December 2022, CUSO Realty Investors One, LLC ("CRIO"), a CUSO co-owned by 23 credit unions, closed on the acquisition of Affinity Federal Credit Union's ("Affinity") headquarters property in Basking Ridge, NJ. Affinity, which had owned and occupied the property since 2008, will lease back the full property for an initial term of 20 years. Michigan State University FCU was the lead lender on the deal, with other credit unions purchasing participation interests. CU Capital Management negotiated the transaction and managed the funding and closing process on behalf of CRIO.
NYMBUS CUSO's C-Suite Interviews: Guy Messick and Mitchell Amsler
In the eighth installment of NYMBUS CUSO's C-Suite Interviews, John Janclaes (President, NYMBUS CUSO) sits down with Guy Messick (CEO, NACUSO Business Services) and Mitchell Amsler (CEO, CU Capital Management) to discuss the unique opportunities available to credit unions through CU Capital Management's credit union sale/leaseback CUSO network.
The Road to Success is Paved with Capital (from Sale/Leasebacks)
Guy Messick shares why all credit unions can benefit from taking steps to raise capital at this time. Credit unions can increase capital organically over time through regular earnings or by issuing secondary capital but those are not always ideal solutions. A third option for raising capital is now available to credit unions that are fortunate enough to own real estate used for operations. That option is a sale/leaseback and doing so with a CUSO structure is a great solution for credit unions.
CUSO Purchases Wescom's Headquarters in Sale/Leaseback Deal
Using investments from 20 credit unions, a CUSO has purchased Wescom Central Credit Union’s office building in a sale/leaseback deal. The buyer is CUSO Realty Investors One, LLC (“CRIO”), which is a CUSO solely owned by credit union investors. CU Capital Management, LLC (“CUCM”), which is also a CUSO, managed the fundraising, bidding and purchasing process on behalf of CRIO, according to the companies. Wescom will lease back the entirety of the building for an initial term of 15 years with options to renew.
CUSO Network Created to Offer Sale/Leasebacks to Credit Unions
The public introduction of the new CUSOs, CU Capital Management (co-owned by Maps Credit Union of Salem, OR) and CUSO Realty Investors One (co-owned by 20 credit unions nationwide), came during the March 2022 NACUSO Network Conference held in Orlando, FL., following by about a month the closing of their first sale/leaseback deal. In addition to a presentation at the General Session, Guy Messick and Mitchell Amsler led a breakout session titled “Opportunities in Sale Leasebacks. More Capital. More Investment Returns. More Loans.”
Announcement of Partnership with NACUSO Business Services
NACUSO Business Services ("NBS"), a wholly-owned subsidiary of NACUSO, has chosen CU Capital Management as its first Promotion Partner. In evaluating CU Capital Management as a Promotion Partner, NBS determined that the firm exemplified its criteria of furthering the mission of NACUSO to strengthen credit unions through the power of collaboration and reflected well on NACUSO’s reputation for integrity and professionalism.
CUNA GAC Interview with NACUSO Leaders
Guy Messick, CEO of NACUSO Business Services (NBS), discusses NBS' founding partnership with CU Capital Management (CUCM). Guy focuses on the benefits of sale leasebacks for credit unions and highlights why a CUSO structure can be a win-win for credit unions participating as sellers, investors and/or lenders as evidenced by CUCM's first sale leaseback transaction, successfully acquiring a credit union headquarters building with 20 credit union investors into the CUSO.
ASC Topic 842: Lease Accounting
Moss Adams guide to the new lease accounting standards, ASC 842. In a sale leaseback transaction, the seller can now recognize the full and complete gain-on-sale in the current period. Under the old accounting standard, ASC 840, the gain-on-sale was required to be recognized over the lease term. ASC 842 is currently in a voluntary adoption period for credit unions with mandatory adoption in 2022.
Current Expected Credit Loss FAQs for Credit Unions
Beginning in 2023, credit unions will need to recognize current expected credit losses (CECL) in full, at origination, for loans and investments. CECL replaces the current Allowance for Loan and Lease Losses (ALLL) accounting standard and is expected to result in an immediate hit to capital upon implementation as well as on a go-forward basis for most credit unions. This paper from the NAFCU provides answers to FAQs on how CECL may affect credit unions.
West Community Credit Union Sale Leaseback
In March 2019, West Community Credit Union was sitting on a Net Worth Ratio of 8.12% and facing growth constraints when it closed on a sale leaseback transaction of its corporate headquarters. This transaction successfully raised the credit union's Net Worth Ratio by 80 basis points while simultaneously allowing the institution to rebuild a branch, invest in new technology for members and generate additional annual net interest income well in excess of the new lease expense.