Credit Union Insights

CUSO’s, Capital and the Culture of Credit Unions

In addition to enhancing income and capital, a Sale/Leaseback transaction provides a “win-win” by enabling CUSO investors to achieve certain tax benefits that are unavailable to credit unions.
Without doubt, the first quarter of 2023 has been a tough one for the banking industry. Fed rates and operating costs up, revenues down, the global economic outlook sketchy. Combine all this with the fast failures of SVB, Signature and First Republic and it all feels circa 2009. And trust — rather the lack of it — is at the core of this angst and uncertainty. i.e., do financial markets trust the Fed? Do lenders trust borrowers? Do customers and members trust their banks and credit unions? All of this “un-trust” makes future planning difficult-at-best leading to a “wait and see” financial environment that benefits almost no one except short sellers and cash-rich speculators. This is particularly challenging for the credit union industry which was built on a foundation of trust, purpose, community, and fiscal conservatism. As a result — credit unions — arguably far more than stock-traded retail banks — have an altruistic need to grow in order to better serve their current and future members. Of course, growth comes at a cost and, particularly at times like this, funding that growth can be a challenge for many credit unions. But funding is possible and, best of all, can be achieved relatively quickly through a process with a strong foundation of trust from within the credit union industry itself.

Sale/Leasebacks and CUSOs

The funding process I am referring to melds together two key elements. The first being a commonly used real estate strategy known as Sale/Leaseback. (More on this in a moment). The second being collaboration with qualified Credit Union Service Organizations — CUSOs. Together, Sale/Leasebacks, in partnership with CUSOs, can deliver “win-win” solutions that can benefit everyone involved decades into the future. Hold that thought, as well … So, back to Sale/Leasebacks. What are they and how does they help deliver fast, cost-effective liquidity? Guy Messick, CEO of The National Association of Credit Union Service Organizations (NACUSO) frames Sale/Leasebacks this way. “If a credit union sells its real estate, the difference in the sale price and the value of the real estate on the credit union’s books can be immediately recognized as capital. If the credit union desires to retain the use of the real estate for its operations, it can lease back the real estate for a period of time.” In addition to enhancing income and capital, a Sale/Leaseback transaction provides a “win-win” by enabling CUSO investors to achieve certain tax benefits that are unavailable to credit unions. Operationally, by leasing back the facility (or facilities) it just sold, the credit union maintains uninterrupted operations and control for a lease term negotiated to suit its long-term occupancy needs — typically 20 or more years — often with extension options. Financially, thanks to recent changes in accounting rules, by selling one or more facilities, a credit union can recognize an immediate capital infusion to invest in new branches, member-facing technologies, staff recruitment/retention, as well as in loans to generate additional interest income.

Role and Benefit of Selling to a CUSO

CUSOs have been around for decades providing the credit union industry with an array of value-added services to help expand capabilities and control costs.

Structurally, a CUSO must be a limited liability company, corporation, or limited partnership, and have at least one credit union owner. It can be wholly owned by one credit union, multiple credit unions, or partially owned by credit unions and non-credit unions.

Without getting into the weeds, CUSOs also exist to provide personal investment opportunities for CU executives, as well as additional long-term investment strategies for their credit unions. Purchasing the real estate assets of other credit unions for long-term stability is one such type of CUSO.

And this where selling to a CUSO can provide significant benefits for the seller/new tenant … which gets us back to the subject of trust.

Sale/Leasebacks are not uncommon – they take place every day in the commercial real estate market. But here’s the challenge: For most sellers, going from being a property owner to a tenant is often a crapshoot. Even for those with a record of quality, landlords are investors with an ultimate goal of cashing out and making a lot of money. Even though your rent may be contractually secured for the next decade, what happens if/when your new high-quality landlord decides to sell to a significantly lower quality owner? Who then sells to even lesser-quality owner?

You get the picture …

By comparison, a CUSO intends to hold the property for the duration of the seller’s tenancy. Also, a CUSO landlord is not separate from your industry, but part of it. Investors that own and operate CUSOs are like-minded colleagues with reputations to uphold within the credit union industry. The result is cooperation, consistency, accountability, and peace-of-mind throughout the lease term.

In other words … trust.

A Cultural Connection

In a season of rough financial seas, it’s good to be in a sturdy craft with like-minded partners all pulling together. Sale/Leasebacks can be that vessel and a real estate-focused CUSO can be the able-bodied crew. Guy Messick of NACUSO wrote, “Cooperation among credit unions is a natural extension of the collaborative model of credit unions themselves. Collaboration is in the DNA of credit unions that fostered a climate for CUSOs to ultimately flourish.” Since our inception, Rubicon has been a strong advocate of Sale/Leaseback strategies for some credit unions. Not for all … some. Should the opportunity arise, we believe that working with a CUSO is worthy of consideration.

Corey A. Waite is a leading commercial real estate advisor to the financial services industry. As Founder and CEO of Rubicon Concierge Real Estate Services, Corey works directly with senior executives coast-to-coast to deliver strategic plans and transactional services focused on optimizing the needs of employees, clients and members.

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