Tapping Into Your Treasure Chest
If your credit union is desiring growth but wondering how best to fund it, the treasure locked inside your own real estate portfolio may well provide the answer.
Last week, I came across a compelling and timely article posted on CUToday.com. Entitled “The Road to Success is Paved with Capital (From Sale/Leasebacks), the post was written by Guy Messick, CEO of NACUSO Business Services, a subsidiary of the National Association of Credit Union Service Organizations.
In his post, Mr. Messick describes three basic options for generating capital to fund future credit union growth. Clearly, per his title, he advocates for Option #3.
Option #1. Organic Growth:
i.e., Access capital achieved by revenue exceeding operating expenses over a period of time. Always a desired goal but not necessarily a fast one.
Option #2. Secondary Capital Offering:
While a potentially faster way to secure capital, Mr. Messick points out that obtaining NCUA approval is often a long, costly, and often not successful process. He also points out that secondary capital is also considered subordinated debt that has to be paid back.
Option #3. Sale/Leaseback of Owned Real Estate:
Here, I’ll quote the article directly …
“If a credit union has owned the real estate for a number of years, a portion of the cost of the real estate has been written down and there is a good chance that the market value of the real estate has appreciated in value. 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 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, typically for ten to twenty years with options to extend. There is no lack of sale/leaseback buyers.”
Below that it read:
Rubicon endorses this strategy and, typically for the clients that have seen strong appreciation in their owned-assets, we often encourage them to consider sale/leaseback as a relatively fast and highly cost-effective way to fund future growth. In fact, Mr. Messick’s article resonated strongly with us because Rubicon has written about this exact topic three times during the past year while also assisting five credit union clients in facilitating sale/leasebacks. For our take, also see the links below. (They’re short, I promise).
In spite of the pandemic and even in the face of rising interest rates, commercial property remains in strong demand. If your credit union is desiring growth but wondering how best to fund it, the treasure locked inside your own portfolio may well provide the answer.
- But What If? – Driven by the COVID-19 and its hideous variants, the world is changing in myriad ways. Remarkably, many industries and organizations have used the pandemic as a way to re-invent themselves and catapult their businesses forward. Those that assume that things will simply “return to normal” are likely mistaken.
- Rock & Roll and Your HQ Strategy – In a world where seemingly everything is changing, it’s logical for credit unions to “stand pat” when it comes to their headquarters. But this period of uncertainty can be a gateway to significant benefits – as long as those HQ decisions are made with your mind wide open.
- Own Your Headquarters? Maybe You Shouldn’t – Credit Unions have traditionally owned their headquarters. But, like so many other things, COVID is upending the tried the true. Here’s the time may be right to re-consider the age-old own vs. lease strategy.
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.
When it comes to the credit union industry, I never cease to be inspired by the many people I meet who are committed to making their organizations and communities stronger and more sustaining.
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.
Silicon Valley Bank (and others), inflation, fed interest rates and future job uncertainty are all fueling concerns about and within the banking industry. Yet, in the face of all this uncertainty, credit unions and community banks are still expanding their branch networks. Why? And are they going about it in the right way?
Nearly every firm we know has — or is in the process — of evolving its workplaces in order to recruit and retain key talent and grow their business. See what one of the world’s leading consulting firms has to say on the matter.
A lot of smart people go deep to deliver powerful information and insights that can benefit your business. And the best leaders are those who carve out the time to find, consider and, if and when appropriate, employ what they’ve learned.
For all its angst, the pandemic has been a catalyst for change throughout the credit union industry. CU’s of all size are embracing innovation and re-considering everything … especially when it comes to design and purpose of their branches.
While considering growth into new markets, credit unions should keep two things in mind: One, even nearby, expansion costs can differ wildly. And two, rigidity in expansion planning – while prudent – can also be costly.
Expanding a real estate portfolio is a heavy lift for any credit union. Succeeding with an expansion initiative – and with your Board of Directors – requires some important and un-relenting disciplines.
In the race to anticipate the future and stay ahead of the competition, it’s important to recognize that the “next shiny thing” is not really what your members want most. What they want is satisfaction.
In the face of so much uncertainty, the key to future growth – if not survival — for many credit unions is through mergers and acquisitions. Often times, the ultimate success of am M&A transaction is based on the true value of the seller’s real estate portfolio – and this is where assessment and due diligence isn’t always what it should be.
The sticker shock rise in construction costs has many credit unions pulling back on their current project pipeline. While that makes sense, it doesn’t mean you have to suspend your overall growth plans.
Trying to make up for lost time (and commissions), the real estate industry is eager to have you make deals. After all, what could go wrong?