FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Sale Leaseback of Bank Premises
June 2, 1987
Pamela E. F. LeCren, Senior Attorney
According to the documentation forwarded to the Washington Office, the above captioned bank on November 27, 1985 entered into a series of transactions whereby the bank sold the bank's premises to a partnership formed for the sole purpose of holding the bank's premises. The partnership consists of the bank's board of directors. The bank retained a fee simple interest in the land on which the bank premises is situated, the partnership leased the building back to the bank, and the bank in turn leased the land on which the bank premises is located to the partnership. The partnership funded its purchase of the bank building at the ***. The loan was collateralized by the bank building, the partnership's leasehold interest in the land, and the land itself. The bank and the partnership assigned the payments payable under the leases to the savings & loan association. Presumably the lease payments will entirely service the debt to the savings & loan association. It is our understanding that the above described transaction was entered into by the bank in order to increase the bank's capital and that from an accounting and capital standpoint the regional office has no objection to the transaction.
Section 332.1 of the FDIC's regulations prohibits a state nonmember insured bank from guaranteeing or becoming surety upon the obligations of others. Inasmuch as the savings & loan association is looking to the lease payments on the bank building for repayment on the loan, and as a practical matter, the bank's building and land stands behind the obligation of the partnership to the savings and loan, you have expressed the opinion that the sale-leaseback transaction as described is in effect a guarantee in violation of section 332.1. Upon reflection, it is the opinion of the Washington Office that the transaction does not constitute a guarantee in the legal sense and thus is not subject to section 332.1. Despite the fact that the bank's assets may be used in satisfaction of the partnership's debt, the bank has not entered into "an agreement creating a secondary liability on the preexisting obligation of another to pay in the event that the other does not." Bank of North Carolina v. Rock Island Bank, 570 F.2d 202, 206 n.7 (7th Cir. 1978). The fact that a default by the bank on its obligations under the lease could lead to a foreclosure on the bank's building and land does not transform the transaction into one of a guarantee. Even if it did so, it would appear that the bank has a substantial interest in the overall transaction (increasing the bank's capital) so that one could find that the transaction falls within the substantial interest exception to section 332.1 that has been recognized over time on an interpretive basis. We acknowledge that this places a very formalistic interpretation on Part 332, however, to do so is consistent with earlier opinions and the fact that other transactions which may be the economic equivalent of a guarantee (e.g. a standby letter of credit) are not considered to violate Part 332.
Section 23A of the Federal Reserve Act (12 U.S.C. 371c)
Section 23A restricts transactions by a bank with its affiliates. As section 23A specifically indicates that any company engaged solely in holding the premises of a bank shall not be considered to be an affiliate (12 U.S.C. 371c(b)(2)(B)) the transaction at issue does not raise any section 23A questions.
Regulation O (12 C.F.R. 215)
Federal Reserve Board Regulation O places restrictions on extensions of credit to bank directors, executive officers, principal shareholders, and their related interests. Although we do not have any specific details regarding the partnership which purchased the bank's premises, for the purposes of this analysis we will presume that the partnership is a related interest of one or more of the bank's directors. If the sale-leaseback transaction constitutes an extension of credit for the purposes of Regulation O, then that extension of credit will have to conform with the requirements of the regulation. Section 215.3(a) defines extension of credit to mean, among other things, any transaction as a result of which a person becomes obligated to pay money (or its equivalent) to a bank, whether the obligation arises directly or indirectly or because of an endorsement on an obligation or otherwise, or by any means whatsoever. (12 C.F.R. 215.3(a)(8)). According to ***, Attorney, Washington Office, FRB, *** a lease that meets the criteria set out in Regulation Y (12 C.F.R. 225.25(b)(5)) is considered to be an extension of credit for the purposes of section 215.3(a)(8) of Regulation O. The lease of the land to the partnership by the bank gives rise to a direct obligation on the part of the partnership to pay money to the bank and thus could be considered to be an extension of credit if the lease meets Regulation Y. That does not appear to be the case, however. Even if this were not the case, it is our opinion that a sale-leaseback of a bank's building which involves the lease of the land on which the bank's building is situated should not be considered to be an extension of credit for Regulation O purposes. (*** concurred in our opinion.) Such a lease is unlikely to arise, if ever, in any other context than that of a sale-leaseback entered into by a bank for tax reasons or for some other purpose such as to increase the bank's capital. If the overall transaction presents problems from a safety and soundness view point, the FDIC can adequately address those concerns outside of the context of Regulation O. As it would be extremely difficult to find a comparable transaction with persons not associated with the bank against which to test the transaction, it would be conceptually difficult to apply the preferential standard set out in Regulation O to the transaction. Additionally, as a sale-leaseback transaction typically involves partnerships or companies formed by bank insiders for the sole purpose of acquiring the bank's premises, obtaining the requisite prior approval of the lease of the land could be impossible. (It is possible that a majority of the bank's board of directors will be "interested" in the transaction.) While it is possible to structure a sale-leaseback of a bank's building and the concomitant lease of the land to a partnership consisting of bank insiders so as to benefit the bank insiders to the detriment of the bank, the lease of the land is so inextricably linked with the sale-leaseback of the bank's building that it simply makes more sense to address the transaction as a whole (i.e., criticize the transaction or not based on safe and sound banking practice, breach of fiduciary duty, etc.). If one were to apply Regulation O it is possible that the transaction simply could not take place as it may be impossible to comply with the regulation. As such transactions may be beneficial to a bank, it is our opinion that we should not adopt a position that could preclude the transaction from taking place at all.