By Guy Messick
NACUSO is always searching for ways collaboration can help credit unions manage the issues facing them; issues such as how does a credit union earn sufficient income from its excess cash to grow and remain competitive?
Through the use of CUSOs, CU Capital Management (CUCM) has transformed the sale/leaseback model to enable credit unions to retain all the profits within the credit union industry. Instead of private funds purchasing real estate from credit unions and reaping the financial rewards of a stream of lease payments, CUSOs are the purchasers. The credit unions that fund these purchases receive the profits.
The Business Model
Here is how the business model works.
- Credit unions invest in a Funding CUSO.
- The Funding CUSO invests in Property Owning CUSOs that purchase real estate (headquarter buildings, operation centers and branch networks) from credit unions.
- There is one Property Owning CUSO per purchase transaction. If it is a large purchase, the Property Owning CUSO uses debt to finance some of the purchase price. The loans typically have conservative loan-to-value ratios, i.e. 50% to 60%.
- The Property Owing CUSOs lease the real property back to the selling credit union on a long-term basis. The revenue from the leases flows back to the Funding CUSO and the credit union investors.
The Minimum Investment
The minimum investment in the Funding CUSO is $1 million. There is no maximum. When a credit union invests in the Funding CUSO, the credit union is immediately earning revenue from the existing portfolio. As new properties are purchased, the credit unions are given an opportunity to invest more. Even if a credit union does not invest more, the credit union will continue to benefit from the revenue generated from the entire portfolio.
Returns in Excess of Other Permissible Investments
CUCM does not take a fee unless the annualized returns to the credit union investors is at least 5%. The current annualized returns are over 6%. As the rents increase each year, the revenue generated will also increase. All the leases are triple net, with the credit union tenant assuming all maintenance and repair obligations, including repairs to the building structure. The lessor can step in and make repairs if the credit union tenant does not do so, at the tenant’s cost. This arrangement enables the credit union tenants to continue to have control over their building and enables the investors to enjoy returns not reduced by building maintenance expenses.
Returns Are Not Tied to Market Fluctuations
The federal interest rates will increase and decrease over time. The revenue from the CUSO is locked in by contract and does not fluctuate based on the general interest climate. In a low-interest rate environment the return on this investment becomes even more attractive than other investment options tied to the market. As the market rates lower, the interest paid on loans associated with the purchases of real estate will be lower, resulting in higher investment yields.
Returns are Paid Quarterly
Partial investment returns are paid quarterly. After the accounting for the subject year is complete by the first quarter of the following year, the balance of the annual return is paid.
No Legal Restrictions on the Amount That Can Be Earned
Since this is a CUSO investment, there are no limits on the amount of revenue a credit can earn. The only restriction is that a credit union may only invest up to the amount of its unused CUSO investment limit. Note that this CUSO investment limit increases each year as the credit union’s assets increase. Only the credit union’s cash investment in its CUSOs is counted and not the present worth of its CUSOs. If an investment is made by a credit union’s CUSO, that amount is not counted in the credit union’s CUSO investment limit.
Net Income is Higher than Loan Net Income
Every loan program has sourcing, underwriting, servicing, and collection costs which reduce the net yield on a loan. While the representatives of the credit union owners make up the boards of the CUCM does all the administrative work (e.g., sourcing investors and sellers, managing the purchase process, managing the lease relationship, and managing the financial obligations to the investors). CUCM takes a portion of the investment return as a fee but only if the credit unions receive at least a 5% annualized return. There is no assets-under-management (AUM) fee charged by CUCM to the Funding CUSO.
Lending Opportunities are Also Available
The larger purchases include both equity and debt. This means the investors also have lending opportunities. The investors are given priority to both bid to be the lead lender and buy loan participations.
Low Risk & An Excellent Repayment Source
The revenue for the investment returns are lease payments from well-capitalized credit unions for real estate assets critical to their operations. If a credit union merges with another credit union, the continuing credit union has the legal obligation to continue to make lease payments. If the credit union is conserved, the conservator has the obligation to continue to make payments to retain the lease.
Great Collateral
The investors are the owners of the real estate and that is an asset that can be sold if the credit union vacates the real estate. When CUCM evaluates a purchase, consideration is given to the ability to sell the real estate if the need arises.
If there is a higher risk due to the location of a property, a purchase may be declined, or the rent may be set at an amount sufficient to compensate for this risk. CUCM has permitted credit union tenants to sublease a small portion of real estate but only if the credit union remains liable for 100% of the rent under the master lease.
Diversification of Risk
The Funding CUSO’s ownership of multiple Property Owning CUSOs gives it a diversified investment portfolio.
Isolation of Risk
If there are legal issues with one credit union and its real estate, the legal risk is isolated to the respective Property Owning CUSO that is the owner/landlord and does not flow back to the Funding CUSO and its investors.
Good Liquidity
Each year CUCM has the value of the Funding CUSO established by a qualified third party so that if any credit union wants to sell its Units, there will be a pre-determined price that enables a timely sale. CUCM believes that the attractiveness of the investment and the third-party appraisal will enable a credit union to quickly find (with help of CUCM if desired) a credit union buyer. This liquidity will enable a credit union to earn attractive returns on funds in the short and mid-term without making a long-term commitment.
Supports Other Credit Unions
For all the financial rewards to the investors, the fact is that these transactions are highly beneficial to the selling credit unions. The sellers get an immediate boast in capital to help them grow which can be transforming in some cases. The sellers/tenants also have the comfort of dealing with a CUSO as their long-term landlord and not multiple private funds. A strong credit union industry helps all credit unions.
This is a Proven Concept
Properties have been purchased from large credit unions such as Truliant Federal Credit Union, Affinity Federal Credit Union, and Wescom Financial Credit Union, as well as smaller credit unions.
There are currently 24 credit union investors from all over the United States that have invested over $$111 million in capital in the Funding CUSO and made, in the aggregate over $111 million in loans. The investors have enjoyed annualized net investment returns that were 4.93% in 2022, 5.00% in 2023 and 5.00% in 2024.
The net annualized return to CUSO investors is expected to be between 5.00% – 5.50% in 2025 before rising to above 6.00% net in 2026. As the rental income increases each year, so will the investment returns. The Funding CUSO has distributed over $10 million to its credit union owners since 2022 through these regular distributions.
The Opportunity is Huge
The NCUA reports state that more than 3,300 credit unions collectively hold over $31.5 billion in real estate assets on their books. That represents the collective cost less depreciation, so it is a small fraction of the estimated market value. The credit union industry has plenty of runway to help the sellers immediately grow capital and the investors to make very attractive returns. There is no reason to give away this revenue to the private sector.
For more information please feel free to contact Mitchell Amsler, CEO of CUCM, at [email protected] myself at [email protected]
Guy Messick is business services advisor at NACUSO.
