Looking For Extra Liquidity? Find Cash in Your Real Estate

Liquidity for credit unions large and small is tight at the moment. Regulators want to see that credit unions have a certain percentage of capital on their books, but where can credit unions quickly raise funds? How about with the real estate your credit union already owns?

Our CoFounder/Host Sarah Snell Cooke sat down with CU Capital Management CEO Mitchell Amsler to discuss how credit unions can activate their real estate to boost liquidity through sale-leasebacks. Interestingly, it can really give smaller credit unions looking to grow an advantage. Another ace up credit unions’ sleeves.

Read the full transcript:

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Sarah Cooke 00:00

Hello and welcome everybody to The Credit Union Connection. My name is Sarah Snell Cooke. I am your host, and I am here today with Mitchell Amsler from the CU Capital Management company. It's a CUSO. Welcome.

Mitchell Amsler 00:14

Thank you, Sarah, appreciate it.

Sarah Cooke 00:58
Tell us a little bit about CU Capital Management.

Mitchell Amsler 01:02

So CU Capital Management is a CUSO that was started by credit unions and for credit unions to focus on sale leasebacks for credit unions. And what that really is, is an opportunity for credit unions to raise capital and liquidity through the real estate that they already own and use. And we found that there really was a need for credit unions to be able to raise capital through alternatives that did not exist in the market, and that's why we started this. CUSO. yeah,

Sarah Cooke 01:33
always, especially right now, liquidity is super important, and as rates go down, hopefully I'll be

lending again too. So walk me through the process. How does this actually work?

Mitchell Amsler 01:45

Okay, so about two thirds of credit unions own some or all of the real estate that they use for their operations. So that could include branch networks, that might include administrative buildings, like your headquarters building, back office centers, things like that, and credit unions have to carry that real estate on their balance sheet at depreciated cost. That means that they're showing it on their balance sheet at a value less than what they paid for it often many years or decades ago. However, that real estate, as most credit unions know, is worth far more in today's market than what they paid for it. And so a sale leaseback allows a credit union to tap into that market value of the real estate while seeing no change in their day to day operational use of the properties. And so what happens, really is a credit union would work with our CUSO to value the property, to come up with a solution that works for both sides, for the CUSO and for the selling credit union. And they sell that property to the CUSO, and then on day one, they turn around and lease it back. And so from the perspective of their employees and their members, there really are no changes to what's going on. The Credit Union continues to operate and maintain the properties, as they did when they owned them, and the CUSO basically just serves as as a landlord that collects rent every month but doesn't do anything else to interfere with your operations. And so we really feel that having a CUSO on the landlord side sets up a very good landlord tenant relationship, because every credit union that might sell to a CUSO is going to be connected through a first or second degree connection to the credit union owners of a CUSO. And that really helps alleviate one of the concerns that we found a lot of credit unions rightfully had with the idea of selling their real estate to some other party, is that having a CUSO on the other side of that really gives you a lot of comfort that you've got a good actor that's looking out for your interest that really is looking to help the credit union space. And so why would you do this as a credit union if you owned your real estate? And the real reason here is to raise capital and to raise liquidity in order to help your own credit union, from both the regulatory perspective and from a growth perspective. And because we all know that even a credit union that's well capitalized in this market is facing pressure from your regulators to say you're at 7% capital. You need 8%. If you're at 8% they want you at 9%. If you're at 9%, they want to understand how you're going to get toward 10% and so on top of that, in this market too, liquidity has become ever more important as deposits run off in different places. And so this really gives credit unions another pathway to raise liquidity overnight in order to put that into different initiatives for the credit union. And so what you can do with this capital, right, is you can both hold it on your balance sheet for sort of a regulatory cushion, but you can also use that capital to invest back into your credit union. So that could mean opening new branches. That could mean acquiring bank branches, that could mean facilitating a merger with another credit union, investing in other CUSOs, investing in back office technology, right sizing your investment portfolio to get rid of lower yielding investments and bringing on higher yielding investments. And so what we found is it really doesn't, it doesn't do a lot of credit unions any good to hold real estate at this low depreciated cost on your balance sheet when you can, you know, recognize that gain on sale, you can get all of that capital, and you can put that to work for your credit union. And one of the reasons why credit unions, we found really never did this before, is that until 2022, the accounting rules that were in place for credit unions didn't let you recognize the gain on sale up front and immediately. And so it really didn't help you as a credit union to sell your branch network, lease it all back, and then just get a fractional portion of that gain on sale every year. But after 2022 when the accounting rules changed, now a credit union can get that entire gain on sale, which is that market value less your your book value on your balance sheet, up front and immediately. And so that flows right to net income and net worth. And so what we've seen with credit unions we've worked with is that they're, they're getting anywhere between, you know, 50 basis points and over 200 basis points of net worth ratio increase just from something like this and, and so that kind of capital for credit unions really is transformative, you know, and we worked with with small credit unions that have seen that this is sort of the sale we spec is like the catalyst that can get them from a level around 100 million in assets to really grow out of that and start to generate, year over year growth for the credit union where they really didn't have the flexibility before that to kind of get out of that space, just because of how expensive it is to now operate a credit union, to comply with regulations. And so we work with credit unions, you know, large and small, in order to get them that capital through their real estate and through sort of a turnkey solution. So from the perspective of a selling credit union, you know, there isn't a lot of heavy lifting you have to do. We just need to work through the process with you. But ultimately, you know, we want to come up with a solution and a structure that works for that selling credit union. And so, you know, we like to see a credit union, you know, doing a sale lease back with real estate that they want to continue to utilize. So, you know, from our perspective, we would love to see a credit union leasing that property back for 10, 15, even 20 years, with extension options for them, and that way the selling credit union gets to sort of have full clarity for generations that they will use that real estate. And as a CUSO, we can pay a premium for the stability of a relationship like that by having a longer lease term in there. And so what we've really found is that having, you know, a CUSO that is 100% owned by credit unions as the buyer of this real estate gives sort of a win-win solution for all sides rather than having, you know, a private real estate fund in there that's going to have to give returns to investors and things like that, this really is about generating capital from within the credit union space for other credit unions.

Sarah Cooke 08:46

Yeah, and you kind of answered my next question already. But if you could give us a quick synopsis, quick bullet point of the advantages of doing a deal like this.

Mitchell Amsler 08:58

Yeah, so doing something like this really lets you unlock the capital that, that you should have access to, but unfortunately, because of the way that accounting rules work and the restrictions on, on credit unions, you can't tap into that capital. So this sale leaseback allows a credit union to tap into that capital and actually put it to work for your credit union. And so no longer are you kind of sitting there just watching the value of real estate kind of move up and down, but usually up over time. Now you can take that capital and you can put it into your credit union. And so when you think about you know what you can do in terms of turning that new capital into earning assets for your credit union, whether that's, again, sort of indirectly, through investments in technology and back office and other employees and growth that way, or through actually growing your loan portfolio or your investment portfolio you are, you know, more than offsetting a new lease expense and now you're generating compounding net income year over year for your credit union through something like this. And so what we found is that, you know, it really doesn't do a credit union any good to have that real estate just sitting there on their balance sheet. This is what allows you to really, actually invest back in the credit union and doing this type of transaction with a CUSO gives credit unions the comfort that you've got a good actor on the other side. And ultimately, you know, we all know that, you know, boards may want that option to buy back the real estate down the road. And so while there are accounting rules that prohibit it from being contractually mandated in a lease, we can promise, right, that you've got a CUSO on the other side. And if a credit union says, look, we've, we've experienced all the growth we think we're going to experience right now in our market, we've got excess capital 10 years from now, and they want to buy back that real estate. That's something that the CUSO is committed to doing to make sure that the credit union, you know, is able to put its capital to work how it best sees fit for itself and for its members.

Sarah Cooke 11:05

And you mentioned also a bit ago, because I was looking, I was reading about like Wescom and some of the larger credit unions doing this, but it does sound like you work with all size credit unions, but also almost sounds like the smaller credit unions might even be more advantage, to get more advantage out of doing a deal. Like, does that make sense? Yeah.

Mitchell Amsler 11:25

I mean, I think when you look at the, the, the percentage benefit for a credit union, right, you're going to just see that a smaller credit union can often see sort of outsized benefit from a sale lease back. And so one credit union that we worked with based in Northern California, you know, they had a three and a half million dollar gain on sale from their sale lease back for their headquarters building and flagship branch. And while that may not be a large number for a Wescom or a multi billion dollar credit union, for a credit union with $100 million in assets, to see a three and a half million dollar immediate increase in net worth is transformative for them. And what you can do with that, from a assets perspective and a growth perspective, and really generating what would have been a decade of income overnight, you know, becomes a really interesting opportunity for a credit union of that size. But we found that, you know, even looking at, you know, large credit unions, whether it's a headquarters building or, you know, a six or 12 branch location sale leaseback, you know, it really can become capital that is transformative for them as well, because of what they can do from a growth perspective. And so that's really what it comes down to, I think, from our perspective is, you know, this isn't going to be a good solution for a credit union when you're looking at just a band aid to stop, you know, losses, year over year, and you want to kind of grow your your net worth, to give yourself another year or two of time to figure something out. This is a great solution when you're a credit union that just needs to get a little bit of breathing room in your capital ratios in order to invest in the credit union. Or if you have sort of a growth plan for the credit union, kind of the things we talked about before, and this capital and this liquidity really gives you the opportunity to put that into overdrive for the credit union.

Sarah Cooke 14:23
So, obviously, you're a CUSOs owned by credit unions. What is the what do they get out of this? Obviously they're looking, you know, to benefit from it as well.

Mitchell Amsler 14:36

So we have about two dozen credit union owner investors in the CUSO right now, it's a number that we would love to see grow over time as we have an opportunity to grow the CUSO through more sale lease backs. And what we found is those, those initial credit union investors, really understood how sale leasebacks for other credit unions you know, could benefit the credit union industry as a whole. And so, you know, the first order of business here, right, is credit unions helping other credit unions. And that's what we think makes the credit union ecosystem so unique when you compare it to any other industry, not just in financial services like banks, but really any other industry where you've got so much cooperation amongst credit unions, within your peer group, within your geographical area, and within the, you know, in the broader credit union industry. And so the first order there was these credit unions said, you know, this is an incredible opportunity for credit unions that need capital and liquidity to raise it, and we want to be part of that. But, you know, they're not doing that just out of the goodness of their heart. They need to get something out of that, both for their for their boards, for the regulators, for their members and for their employees and their own stability and growth. And so what do they get out of that? They get out of that a stable quarter over quarter cash yield from being a landlord to the CUSO and so because we have long term leases with well capitalized credit unions on the selling side of the CUSO, those investor owner credit unions basically just receive that cash flow on a regular basis, and it's something that grows over time because of small lease increases every year, and those credit union owners at the CUSO don't really have to do anything, because it's a it's a hands off landlord relationship, right? We want the credit union that has sold its branches to the CUSO to keep maintaining those and operating them as they did when they owned them. Those credit unions are best equipped to to to know what that building needs in order to keep it up for their members and employees. And so we set the lease rate a little bit lower in order to account for the fact that the credit union has those expenses. But then the CUSO really just gets a very stable cash yield because you don't have variability year over year of what's going to happen with this one building. What are my unforeseen expenses? And so it really is a sort of no effort, regular yield on your investment as a credit union, you know, owner of the CUSO, and we set this up in a way where the CUSO is not, the credit union owners of the CUSO are not investing in, in this sale leaseback, and that sale leaseback and onesies and twosies. They're investing in, sort of our parent level, CUSO. We like to think of that as like an ETF or a mutual fund. And then that CUSO is what sets up the relationships with every selling credit union. And so that way, if you're a credit union, you know, investor, owner of the sale leaseback CUSO, you get diversification from returns tied to every single sale leaseback that the CUSO, that you as an owner of a CUSO, have approved to go forward. And so it really gives you diversification because you're not tied to a single credit union opportunity. It gives you liquidity because you have one investment, you don't have 15 different piecemeal investments and sort and it still gives you sort of some of that, we'll call it a decision making capability, because as a CUSO owner, you get to vote on what the CUSO does. And then on the other side of many sale expect transactions, we also have a credit union alone to help facilitate it. And so sometimes when you're purchasing a property, and again, that's going to depend on the size of the transaction and what the rate environment looks like, but we might purchase a credit union property with some equity and a partial loan, say, for 50% of the value. And so with that loan, we'll have a credit union make a, make a 50% loan to value loan and participate that out to other credit unions. And some of those credit unions are part of the CUSO and some of them aren't. And so now you have, you know, credit union investors getting an equity return. You've got credit union lenders and credit union loan participants getting an incredible loan return as well, both of those, which we think are perhaps the safest investment or loan for a credit union, because you're lending or investing in underlying, well placed, well taking care of real estate, real estate that's utilized and has been utilized by a well capitalized credit union for a long period of time, and that is tied to the income coming from that rental income. And you know, as we all know, right, credit unions just are, are an incredibly safe investment opportunity. They're an incredibly safe group to work with, and no one understands that better than other credit unions, right? And so we really think that, you know, not only is your investment or your loan backed by well located, you know, real estate, but it's also backed by the the income coming from a well capitalized credit union.

Sarah Cooke 20:04
And so when I have guests on here, I always offer them the final thoughts, final words, what? What do you have to say?

Mitchell Amsler 20:11

You know, we just think that. You know, we know that new ideas in the credit union space take time to to generate momentum and for credit unions to get comfortable. And so we, we've really appreciated the opportunity we've had to date, to speak with a lot of credit unions about why something like this can work and can benefit them, benefit them. And we really just want to make sure that credit unions know there's a CUSO opportunity to do a sale lease back, and that it really can be as good as it sounds, that it really is something that can be transformative for your credit union. There's nothing. There's no hidden tricks. There's nothing like that. It really is just that capital is there, and we want credit unions to be able to access it and to put it back to work for their members and for their own credit union.

Sarah Cooke 21:01
Alrighty, well, thank you so much, Mitchell, for your time today. Appreciate it.

Mitchell Amsler 21:05
Than you. Yeah, I appreciate it. Thanks for doing what you do.