On January 4, 2020, the US Office of the Comptroller of the Currency ("OCC") issued a proposal to amend its regulations on ownership of real property by national banks and federal savings associations (the "Proposal"). 1 The Proposal would codify parts of court and OCC precedent and establish comprehensive requirements for the ownership of banking premises.
In particular, the Proposal would provide clear rules for the circumstances under which a national bank or federal savings association (a "bank") may acquire property to transact its own business and then allow a third party to lease or otherwise use a portion of that property (e.g., a mixed-used development). Additionally, the Proposal would better define how changes in a bank's business (e.g., shrinking, growing) affect its authority to hold property.
Comments on the Proposal are due within 45 days of publication in the Federal Register, which is expected to occur shortly. This Legal Update provides some background information related to banking premises and describes the requirements set forth in the Proposal.
The National Bank Act prohibits a national bank from owning real estate, except for use as banking premises or in connection with lending activities (e.g., making mortgages, settling debt previously contracted). 2 Regulators have applied similar restrictions to ownership of real estate by federal savings associations. 3
Historically, the OCC had codified rules that interpreted aspects of the prohibition against owning real estate (e.g., examples of permissible banking premises), but these rules did not comprehensively set forth the requirements for how a bank could acquire and use real estate to transact its own business. Instead, the agency has issued a body of interpretive letters that construe the prohibition and defer to court cases that address it. For example, a 2005 interpretive letter authorized a bank to develop a hotel as part of a mixed-use development where the bank would occupy 22 percent of the entire project and 10 percent of the yearly room nights available in the hotel.
The preamble to the Proposal states three reasons for codifying past precedent in a comprehensive regulation. First, interpretive letters address specific facts and, therefore, may be difficult to apply to situations that have similar but somewhat different facts (e.g., percentages of use). Second, prior precedent may predate branch banking and, therefore, not address situations encountered by larger banks with many locations. Third, the commercial real estate market has changed in recent years to include more mixed-use developments and comprehensive corporate campuses that are not addressed in prior interpretive letters.
The Proposal would define "bank occupied premises" as real estate acquired and held in good faith and in which more than 50 percent of each building or severable piece of land is or will be used by bank persons for transacting a bank's business, including facilities that may be operated by third parties to provide amenities and services to bank persons or otherwise facilitate bank business operations. This definition is referred to as the "occupancy test" and intended to include third party-provided amenities and services, such as office gymnasia, cafeterias, daycare facilities and printing centers.
A "bank person" would be further defined as an employee, contractor, consultant or vendor of the bank or any other individual who is engaged in the bank's business. Notably, the Proposal does not indicate if or when a customer of the bank may be a bank person.
The preamble to the Proposal implies that individuals other than bank persons may not use third party-provided amenities and services (e.g., a cafeteria that serves bank persons and non-bank persons) and requests comment on how to address "incidental" use of bank occupied premises by others. While it is less likely to arise in the context of corporate campuses, such incidental use may require clarification for bank occupied premises that have greater exposure to non-bank persons (e.g., a daycare facility shared by tenants in an urban office building).
Further, a bank would be required to comply with excess capacity standards that are designed to ensure the bank acquired and holds the property for banking purposes and not as a means to invest or speculate in real estate. The two proposed excess capacity standards are:
- Excess space or capacity that is used by third parties must be legitimately acquired or developed by the bank for its banking business.
- Excess space or capacity must have a nexus with the transaction of the bank's business or bank operations such that it is acquired or held to provide the bank with a business location rather than as an investment in real estate.
The excess capacity standards also contain examples of situations in which a bank using between 50 percent and 100 percent of bank occupied premises would have "legitimate" excess space or capacity that may be used by a third party. These situations include:
- Due to the characteristics of the real estate available in the market, the space or capacity to meet a bank's requirements exceeds its present needs.
- The acquisition and retention of additional space or capacity, beyond present needs, reasonably may be necessary for planned future expansion or to meet a bank's expected future banking needs as long as the bank uses the additional capacity in the real estate acquired for future bank expansion or banking needs within five years.
- Requirements for capacity fluctuate because a bank may need to use the full capacity of a space during peak periods resulting in periods when its capacity is underutilized.
- After the initial acquisition of real estate thought to be fully needed for banking operations, a bank experiences a decline in the level of banking operations or an increase in efficiency resulting in underutilized space or capacity.
- A bank has capacity to allow third parties after-hours use of bank occupied premises. 4
The preamble to the Proposal emphasizes that the volume of real estate that is acquired or the manner in which real estate is developed would need to be consistent with a bank's operations or business to be legitimate. As an example, it explains that a bank that seeks to acquire a strip mall in which it will lease out less than 50 percent of the space to third parties should carefully analyze whether there are other strip malls or free standing buildings in the area that meet its requirements and are more appropriately sized to its space needs. Further, the preamble requests comment on whether certain arrangements that are unlikely to be legitimate should be explicitly prohibited, such as leasing out excess capacity to grocery stores and branded hotels.
The Proposal also would move the OCC's rules regarding the sharing of bank space from their current location to the new comprehensive regulation on bank premises.
The Proposal would grandfather existing real estate holdings that are not consistent with its requirements and, further, would prohibit banks from modifying, expanding or improving such property, beyond performing routine maintenance. This may be a concern for banks looking to remodel facilities to address concerns related to COVID-19 or better use excess space created by work-from-home arrangements. Additionally, the Proposal would preclude banks from using prior agency precedent regarding real estate investments to make new investments in real estate if the prior precedent is inconsistent with the new requirements.
The Proposal is in some respects significantly more restrictive than prior precedent, which generally had permitted banks to acquire real estate in which they used at least 25 percent of the building (and, in some cases, as little as 16.7 percent or 22 percent). It also does not address incidental use of third party-provided amenities (e.g., a restaurant that operates primarily as a cafeteria but serves persons unrelated to the bank). Further, the Proposal's requirements for analyzing prospective projects to ensure that any excess capacity is necessary and related to the bank's business are highly prescriptive. The OCC invited comment on the 50 percent threshold, incidental use issue and legitimacy requirements (e.g., whether use of excess space as a grocery store or branded hotel specifically be prohibited), which should provide the opportunity to obtain further clarification in a final rule. Even though existing real estate projects will be grandfathered, we expect industry will engage with the OCC on the Proposal to ensure real estate practices remain efficient and flexible.
1 OCC, NR, 2021-1, OCC Proposes Rule Regarding Permissible Bank Premises (Jan. 4, 2021), https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-1.html.
2 12 U.S.C. § 29.
3 E.g., 80 Fed. Reg. 28,345, 28,377 (May 18, 2015).
4 The preamble to the Proposal explains that after hours use by third-parties would not affect the 50 percent test in the definition of bank occupied premises.
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