New Opportunities for Credit Union Ownership of Real Estate

Proposed changes to NCUA’s rule on federal credit union (FCU) ownership of real estate and to the Massachusetts credit union parity rules, promise to open new areas of credit union investment in real estate as an ancillary business line. Assuming both proposed rule changes take effect this summer, FCUs and MA state charters will have the ability to buy, develop, own and sell commercial real estate, provided that the FCU eventually (within six years of purchase or such longer period as NCUA may allow) occupies at least half of each property. The remaining space in each property may be leased by the FCU to unaffiliated tenants or to a developer entity, for re-leasing to third parties. In calculating how much of a property a specific CU occupies, space occupied by a CUSO that is controlled – through voting rights, without necessarily majority economic ownership – by the CU may be included.

Combined with last year’s NCUA action which eliminated the 5% cap on fixed asset ownership by non-RegFlex FCUs, NCUA is now about to allow FCUs to acquire commercial properties they can never fully utilize, by treating up to half the property for investment/rental purposes. This will allow FCUs to consider ownership of small strip malls and other income-producing properties which were previously off-limits, and could signal a shift away from leasing and toward ownership as FCUs site their branches and operations centers.

The financial benefit from this major regulatory change can be enhanced if FCUs are able to create CUSO-based joint ventures with private real estate capital sources to reduce the portion of the equity investment required from the credit union. Further regulatory guidance on this potential aspect of FCU real estate investment is needed, but insofar as all FCUs and many state CUs (soon to include Massachusetts, through the currently proposed amendments to its CU parity rules, to allow state chartered Massachusetts CUs to partner with non-credit union co-owners of CUSOs, just as FCUs have been able to do for more than a decade) can through CUSOs partner with non-credit union co-owners/capital sources, it is possible that through a CUSO credit unions may  acquire commercial property partly for use and partly for investment/rental, and raise at least a portion of the acquisition’s equity capital  from non-CU third party equity sources. Of particular interest is the ability of CU executives to share ownership of CU real estate as partners in a CU-led CUSO, an arrangement that would allow select individuals to co-invest privately in these new real estate ventures. Completing the financing picture could be a commercial first mortgage loan from the sponsor credit union to the CUSO, perhaps with customary limited guaranties from some of the non-CU co-investors in the CUSO.

While this action by NCUA is a welcome step toward more rational, flexible facility ownership and management practices for affected credit unions, and offers those institutions a new ancillary revenue source, NCUA is clear that its action does not allow real estate speculation or full-scale CRE investment by credit unions. All acquired properties must eventually, typically within six years, be at least 50% devoted to housing the CU-owner and/or any CUSO controlled by it.

Whatever deal structures ultimately emerge, NCUA is about to open the door to limited but meaningful credit union equity investment in the kind of commercial real estate deals that previously CUs could finance only on the debt side. And with Massachusetts about to allow state charters to partner with non-credit union co-investors through CUSOs, we can expect to see both federal and state charters here explore equity co-investment opportunities with more traditional real estate investors and developers, and possibly even individual CU executives, as CUs move into this newest investment arena.