Unlock the Value of Your Real Estate

At first, it may seem counter intuitive for a community bank to sell its real estate. The misconception is that a bank must own its real estate to be profitable. In actuality, banks may be less profitable when they are literally sitting on an illiquid asset — the building and land beneath the branch or offices. A bank can benefit financially by selling its real estate through a sale/leaseback program, which increases net income and converts non-earning assets into funds that can be invested while still occupying and retaining control over it.

Sale/leaseback in practice

Increasingly popular with larger financial institutions, community banks can also experience the same benefits from sale/leaseback transactions. Take, for example, SunTrust and Wachovia. SunTrust plans to save $520 million by 2009 through the leaseback of 473 facilities. Wachovia sold 8.2 million square feet of real estate in 150 facilities two years ago only to lease it back for an estimated $22 million-a-year savings. Through sale/leaseback, these banks are freeing excess space, taking assets off balance sheets and reducing costs associated with ongoing property maintenance and taxes.

What is sale/leaseback?

Sale/leaseback transactions begin when a community bank sells its location(s) to an investor. The investor then immediately leases the property back to the bank for an extended time period. These leases generally range from 10 to 20 years with multiple renewal options, including first right of refusal. Most importantly, the lease arrangements enable the bank to maintain long-term control and operating flexibility over its facilities. In addition, the bank will:

• Generate cash that is reinvested in earning assets.
• Reduce overhead by moving the properties off balance sheet.
• Reduce the negative impact of depreciation and/or other overhead expenses on income statements.
• Recognize any gain on the sale over the term of the ensuing lease.

How does sale/leaseback work?

1. Financial institution sells location to investor.
2. Investor leases locations back to FI on long-term basis (e.g., 10-20 years) with renewal options.
3. FI enjoys right of first refusal on any potential sale of the property.
4. Triple-net lease provisions apply.
5. Other standard lease terms apply, as negotiated between FI and investor.

Transaction considerations

How can a financial institution be sure a sale/leaseback is the best strategy? Work with an expert sale/leaseback partner, preferably one that specializes in financial institutions. In addition, financial institutions should be aware of the following factors to success when considering a sale/leaseback transaction:

• Model the impact of the transaction with data that is specific to the financial institution

Avoid modeling approaches that are generic and not specific to the banking sector or to a specific institution. A financial institution should request from the sale/leaseback practitioner that a proposed transaction be analyzed from the financial institution’s perspective, and with the maximum amount of transparency. Data should reflect actual financials and may change several times, based on a variety of “what-if” scenarios.

• Maintain long-term control and operating flexibility over the bank’s facilities

The convenience and appearance of a bank’s locations are important elements of consumer preference. Steps can be taken in negotiating the lease agreement to ensure continued occupancy and maintenance.

• Partner with an expert in the execution of sale/leaseback transactions

The sale/leaseback partner should seek investors that use flexible lease structures that can be tailored to the bank’s specific needs.

• Do not finance the transaction internally

As appealing as it may seem, avoid this temptation at all costs. Apart from the obvious regulatory and corporate governance concerns that may arise when a transaction involves insiders, such transactions may not be accounted for as true sales, thus eliminating the positive economic results of the sale/leaseback.

• Secure the best price

The financial institution’s financial strengths and current market conditions must be taken into consideration to maximize the economic results of the sale/leaseback transaction.

Finding a provider

It is important for a financial institution to find a turnkey process and partner that combine all of the above factors, as well as financial modeling; development of leave-behinds that satisfy regulators and shareholders; and funding sources.

Sale/leaseback transactions can turn a financial institution’s physical property into a source of increased income — an option no longer reserved for only the largest institutions, but one to be considered by all.

BSG Financial, based in Louisville, Ky., specializes in profit-enhancing programs for financial institutions. Hank Thompson is executive vice president business development at BSG Financial. For more information contact Thompson at hthompson(at)bsgfinancial.com or 502-581-1511 ext. 230.

Copyright © November 2007 BankNews Publications