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4000 - Advisory Opinions

Part 362: Equity Investment in a Limited Liability Company Whose Purpose Is Acquiring Low Income Housing Tax Credits


October 13, 1994

Sandra Comenetz, Counsel

This responds to your letter to the FDIC in which you inquire whether an equity investment by a state bank in a State limited liability company (LLC) for the purpose of acquiring low income housing tax credits would be considered an equity investment as a limited partner in a partnership under sections 12 U.S.C. § 1831a(c)(3) of the FDI Act and 12 CFR § 362.3(b)(2); and, if not, whether a state bank could invest in a Utah LLC to the same extent authorized for a national bank. We apologize for the delay in replying.

The starting point for determining whether an equity investment is permissible for an insured state bank is section 24 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1831a, which provides that an insured state bank may not, directly or indirectly, acquire or retain an equity investment of a type, or in an amount, not permissible for a national bank. 12 U.S.C. § 1831a(c)(1) and (f)(1)M.1

There is an exemption, however, for equity investments in qualified housing projects ("QHPs").

Notwithstanding any other provision of this subsection, an insured State bank may invest as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project.

12 U.S.C. § 1831a(c)(3)(A) (emphasis added).2

While it appears that members of LLCs have greater protection from personal liability than limited partners in a limited partnership, the exemption in Section 24 applies solely to limited partnership investments in QHPS. The legislative history to 12 U.S.C. § 1831a sheds no light on Congress's reasons for requiring that an insured state bank invest in QHPs as a limited partner in order to qualify for the exemption. Nor have we found any indication in the legislative history that the section should be read broadly. Moreover, the exemption applies only to the "acquisition, rehabilitation, or new construction" of QHPs, not to the acquisition of tax credits. To the best of our knowledge, equity investment by national banks in LLCs are not among the investments that the OCC has approved across the board for national banks. In keeping with the basic tenet of statutory construction that exceptions are to be narrowly construed, we are reluctant to read the QHP exception broadly, and conclude that an insured state bank may not rely on the exception in 12 U.S.C. § 1831a(c)(3)(A) and make equity investments as a member/owner in an LLC, instead of as a limited partner.

Nevertheless, there may be other ways to approach the issue. We understand that at least one equity investment in a State LLC met the OCC's requirements for a community development investment under 12 U.S.C. § 24 (Eighth) and (Eleventh) and Interpretive Ruling 7.7480 (replaced by 12 CFR Part 24). Thus, if the OCC found that the bank's proposed investment, were it made by a national bank, qualified under 12 U.S.C. § 24 (Eleventh) and 12 CFR Part 24 as a community development investment, the investment would fall outside the scope of Section 24 and Part 362.

For your information, we have enclosed a copy of an FDIC advisory memorandum that, among other things, sets forth the circumstances under which an investment made for public welfare purposes could be permissible for a state bank. If the investment is on the list of previously approved investments maintained by the OCC, or if the state bank (assuming it were a national bank) could take advantage of the OCC's self-certification mechanism, and, in both cases, certain other criteria are met, the investment would be permissible. If the foregoing are inapplicable, the state bank could request the FDIC's consent to hold the investment indirectly through a majority owned subsidiary provided that the bank meets its minimum capital requirements. If none of the foregoing are applicable, and because the FDIC defers to the OCC's determinations in such matters, the state bank could request that the FDIC seek the OCC's opinion whether the activity is permissible for a national bank. If the OCC were to determine that the investment meets its criteria for a national bank, the FDIC would accept that determination.

Thank you for writing to the FDIC.

1"Equity investment" means, inter alia,
  any partnership interest; any equity interest in real estate as defined in § 362.2(e); and any transaction which in substance [meets § 363.2(f) criteria] even though it may be structured as some other form of business transaction.
  12 CFR § 362.2(f). With certain exceptions not relevant here, "equity interest in real estate'' means
  any form of direct or indirect ownership of any interest in real property, whether in the form of an equity interest, partnership, joint venture or other form, which is accounted for as an investment in real estate or real estate joint venture under generally accepted accounting principles. . . .
  12 CFR § 362.2(e). Go back to Text

2A QHP is
  residential real estate intended to primarily benefit lower income persons throughout the period of the bank's investment including but not necessarily limited to any project eligible for the low income housing tax credit under section 42 of the Internal Revenue Code (26 U.S.C. 42).
  12 U.S.C. § 1831a(c)(3)(C)(i), 12 CFR § 362.3(b)(2)(i). Go back to Text

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