Dear Mr. Messick:
You asked if a federal credit union (FCU) may form a wholly owned CUSO for the purpose of purchasing an office building from the FCU and leasing a majority portion of the building back to the FCU. The answer is yes. Based on the information you provided, the proposed activity is permissible because the CUSO would primarily lease the property to credit unions and the members of affiliated credit unions.
An FCU owns a two-story office building. The first floor, which is occupied by the FCU, is 5800 square feet. The second floor, which is leased to a non-credit union entity, is 5500 square feet. The FCU does not intend to occupy the second floor in the foreseeable future; as such, it would like to form a CUSO to buy the office building and lease the first floor to the FCU. The second floor would continue to be leased to the current non-credit union occupant.
Your letter cites as authority for the proposed activity the provision in the CUSO rule that permits the “management, development, sale, or lease of fixed assets” as a pre-approved CUSO service. 12 C.F.R. §712.5(g). You also cite as support for your proposal two previous legal opinions that considered similar leasing arrangements. See OGC Ops. 96-0923 (December 6, 1996) and 00-0327 (August 14, 2000). Those opinions noted that if a CUSO leases its fixed assets, it must primarily lease the property to credit unions and members of affiliated credit unions. This is consistent with the general requirement that a CUSO must primarily serve credit unions and/or the membership of affiliated credit unions. 12 C.F.R. §712.3(b). For the purposes of the CUSO rule, the term “primarily” is not defined. In the past NCUA has determined that a majority, or 50 percent or greater, may in some cases be sufficient to meet the “primarily” serves requirement. See OGC Ops. 96-0741 (September 20, 1996); 01-0746 (August 7, 2001); but see OGC Op. 96-1214 (January 22, 1997). In this case, we believe the “primarily” serves requirement is met because the CUSO will lease the majority of the building (5800 of the total 11300 square feet) to the FCU. You should note, however, that a majority is not the only definition of “primarily” and will not be sufficient to meet the “primarily” serves requirement in all circumstances. OGC Op. 96-1214. We further caution that a leasing arrangement with a CUSO should not be used as a means for an FCU to circumvent the fixed assets rule. 12 C.F.R. §701.36.
You also asked if the fixed assets held by an FCU’s CUSO are counted against the FCU’s total fixed assets for the purposes of our regulatory limitation. The answer is no.
Under the fixed assets rule, an FCU with $1 million or more in assets cannot invest in fixed assets if the investment would cause the aggregate of all the FCU’s fixed assets to exceed five percent of the FCU’s shares and retained earnings. 12 C.F.R. §701.36(a). The fixed assets rule previously required an FCU to include in its calculation of its investment in fixed assets, any investments in, and loans to, a partnership or corporation, including a CUSO, that holds any fixed assets used by the FCU. That requirement was eliminated in 2004. 69 Fed. Reg. 58039 (September 29, 2004). Lease payments are, however, included in the definition of fixed assets. See 12 C.F.R. §701.36(e). Thus, FCU payments to the CUSO under its lease would be included in its fixed asset calculation.
If you have any questions, please contact Staff Attorney Pamela Yu or me.