Credit unions and banks seeking to enhance their capital position and fund growth initiatives may find significant benefits in a sale-leaseback transaction. A sale-leaseback allows a financial institution to sell real estate assets—such as headquarters or branch locations—to an investor while simultaneously leasing them back, thereby retaining operational control of the property. This strategy converts illiquid real estate equity into cash, providing immediate liquidity that can be redeployed into high-priority initiatives. For example, the capital generated can be used to acquire a bank or additional branches, merge with another financial institution or invest in credit union service organizations (CUSOs). By leveraging a sale-leaseback, credit unions and banks can optimize their balance sheets, improve capital ratios and position themselves for sustainable growth, while continuing to serve their customers/members effectively.

A More Effective Capital Strategy in a High-Interest Rate Environment

In today’s economic climate, characterized by elevated interest rates, sale-leasebacks offer a compelling alternative to raising subordinated debt or borrowing money. Subordinated debt carries substantial interest expenses that can dilute earnings if not deployed at a rate of return greater than the cost of interest. Conversely, a sale-leaseback unlocks the value of owned real estate without the ongoing burden of high debt service costs. This immediate liquidity injection provides financial institutions with a more cost-effective solution to strengthen capital. Given the changing market conditions, it’s essential financial institutions be prepared to deploy the most advantageous tool in the capital management playbook at the most strategic time.

Identifying the Ideal Candidates for a Sale-Leaseback

A sale-leaseback strategy is particularly beneficial for credit unions and banks whose real estate assets have appreciated significantly, with fair market values exceeding book values. This scenario offers a unique opportunity to recognize the difference between fair value and book value as a gain on sale, directly increasing the financial institution’s capital. Credit unions and banks are well-positioned to benefit when they have owned their properties for an extended period or operate in areas with substantial real estate appreciation. By unlocking this hidden equity, they can efficiently boost their capital position, creating flexibility to pursue strategic initiatives and enhance member/customer value.

Accounting Considerations for a Sale-Leaseback

Proper accounting treatment is critical for sale-leaseback transactions to ensure compliance and accurate financial reporting. When a transaction qualifies as a sale under accounting standards such as ASC 842 for U.S. GAAP, the financial institution records the fair value of the property sold, removes the asset and associated liabilities from its balance sheet, and recognizes a gain or loss for the difference between the sale price and the book value. The leaseback is then recorded as a lease liability and a right-of-use asset, with lease payments expensed over the lease term. 

Ready to Make the Move?

A well-structured sale-leaseback is a powerful capital management strategy enabling credit unions and banks to unlock real estate value, strengthen their financial position and pursue transformative growth opportunities. By understanding the benefits, market conditions and accounting requirements, credit unions and banks can make informed decisions that align with their strategic objectives and long-term success. Navigating a sale-leaseback can be a complex process. Our team of M&A advisory pros are here to help guide you through the process to ensure its well-positioned to help your institution reap the benefits.