LAKE BUENA VISTA, Calif.–Credit unions were given their first formal introduction to what is being called a “third way” to build capital via a new CUSO that does sale/leaseback deals on CU offices and buildings.
Backers of the initiative acknowledge many CUs feel an “emotional” attachment to their property, but say working with the CUSO helps preserve the connection while unlocking capital that it otherwise going untapped. And the opportunity isn’t just for sellers, the CUSO’s organizers said, citing what they said are numerous advantages for investors/lenders, too.
The public introduction of the new CUSO, CU Capital Management, which is co-owned by Maps Credit Union in Salem, Ore., came during the NACUSO Network meeting here, but follows by about a month the closing of its first sale/leaseback deal.
As CUToday.info reported here, Pasadena, Calif.-based Wescom Credit Union was sold for $59-million and then leased back its headquarters building to a CUSO that tapped investments from approximately 20 credit unions.
During a session titled “Opportunities in Sale Leasebacks. More Capital. More Investment Returns. More Loans,” Mitchell Amsler, CEO of CU Capital Management, joined with Guy Messick, CEO of NASCUS Business Services, outlined why they said sale/leasebacks “make a lot of sense” for many credit unions, addressed some of the uncertainties and misunderstandings, and responded to audience questions.
While sale/leasebacks aren’t new, both Amsler and Messick emphasized that “selling to a CUSO rather than an outside party is advantageous” for a number of reasons.
Additional advantages, according to the CUSO, were presented in the slide show below outlining three opportunities created by collaboration:
Another advantage, according to the CUSO, is the higher investment return, as outlined below.
“When you put a lease on a building it is worth more than the purchase price, because now you have revenue flow,” said Messick. “With the uncertainty over how much space you will need in the future, some of the credit unions we have talked to have said ‘We don’t need this big building. We are probably going to sell it.’ You go out and identify another smaller building that fits your needs, we would buy it and lease it back to you.”
In the case of the $5-billion Wescom CU’s sale/leaseback with the CUSO, it sold the building it had owned since the 1980s and received a $50 million gain on sale, which boosted its net worth from 7.79% to 8.50%.
“It allowed them almost overnight to have a little bit of breathing room and a little bit of flexibility,” said Amsler. “We were one of 20-plus bidders on this deal. The CFO realized selling to a CUSO was beneficial to the credit union movement, as a number of credit unions are receiving that rental stream. We are also committed to holding the property. An outside party may sell that property the next year. They understand we act in their best interests. We are also committed to good faith discussion in the future to any change in plans.”
When it comes to other options for raising capital, both Messick and Amsler said the sale/leaseback is the superior option.
“Secondary capital is a very cumbersome, expensive, restrictive process,” said Amsler.
Added Messick, “Capital is not doing you any good in the building. Take it out now while you still can with good market conditions. And the accounting rule remains the same. You can take all that appreciation this year. You don’t have to amortize it over the life of the lease, which is much less attractive.”
Amsler further noted that a lot of credit union property has been owned for a long time and is often very well located.
Messick acknowledged that many credit union leaders feel an “emotional attachment” to their property. But the structure of the sale/leaseback can help mitigate the fear of losing that attachment, according to Messick, who said the contract can incentivize the credit union to continue to invest in the property. That is the case with Wescom CU, which remains responsible for maintenance. Moreover, lease terms can be as long as 40 years, he said.
“The more responsibility the credit union tenant takes to take care of the property, the less likely the income flow is to be reduced,” said Messick.
The credit union that sells isn’t the only beneficiary, both Amsler and Messick stated, noting the returns are strong for the investing credit unions.
“The benefit is you know the return on your investment every year, you get revenue, and that goes up every year. The returns increase over time and over the term of lease,” Amsler said.
Messick said there is traditionally no brokers on the loans.
“There is really no reason from our perspective why you would need to work with a broker and pay a third party, when you have an opportunity to work with a third party that says, ‘Here are our goals and what we want.’ This also allows for a credit union that is leasing to sublease a property, as well. Having tenants also raises the sale price.
“There is a lot of interest in making these loans,” he continued. “What we have said to investors (CUs) is we are going to give your first priority on these loans. Even if all 20 credit unions wanted to participate in the loans, that is not something we want to see. There are going to be some allocations of the opportunities.”
CU Capital Management has pledges of up to $109 million in funds from the 25 credit unions participating to date for the sale/leasebacks, but it has not tapped all the funds and Messick further said it is a “soft” commitment, as credit unions are given the opportunity to participate in each deal. Messick said the CUSO actually can’t take any more lending credit unions at this point.
Each Property Has Its Own CUSO
In each deal one of the credit unions is the lead lender that, in turn, offers loan participations to a certain number of other CUs. Each property has its own CUSO and its own board. Payments are made quarterly to credit union investors.
According to Amsler, CU Capital Management is compensated via an acquisition fee when the deal is closed and by being paid a percentage share of profits received by credit union investors every year, assuming those fees exceed 5% annually. Anything up to and below that 5% figure goes to the credit union investors. CUCM charges a 60-basis-point processing fee.
“This is a great time for credit unions to be sellers of property, and we would like more investors, but right now the opportunity for our CUSO is for credit unions to sell,” said Amsler. “We think there is a lot of value tied up in real estate that has depreciated over time. It’s an interesting way for credit unions to unlock that capital without having to do anything. Right now, values are still high and there is opportunity to lock that in. Return to office is happening and it’s not going to look like it did before. You can reconfigure the space for a post-COVID return to office environment.”
Added Messick, “This is the ultimate expression of the power of collaboration. We are able to keep the benefits within the credit union system. Capital is what is going to change and be the differentiator between the credit unions that survive and those that don’t. Control your own destiny. If you do have extra equity because you’ve held onto properties in your credit union for 10 years or so, and you have an ability to apply a gain to capital now, I recommend you look at that seriously.”
The Wescom Deal
In the Wescom deal, the buyer is CUSO Realty Investors One, LLC (“CRIO”), with CU Capital Management managing the fundraising, bidding and purchasing process on behalf of CRIO. Wescom will lease back the entirety of the building for an initial term of 15 years with options to renew.
“The lease is triple net with Wescom maintaining full operational control and maintenance of the property, and picking up all building related costs, including structural repairs,” the CUSOs said.
According to the CUSO, the projected annual returns to the credit union investors from the Wescom transaction over the next 15 years are between 5% and 7%, payable quarterly beginning in 2023.
Maps Credit Union, the co-owner of CUCM, said it was the first credit union to use a CUSO as a buyer in a credit union sale/leaseback transaction more than 10 years ago.
Messick and Amsler said one other deal is in the pipeline.