Of the 6,800 banks in the U.S., 66 percent have been in business over 50 years and 40 percent over 100 years (1). Of the approximately 97,000 branches nationwide, it is easy to conclude that a very large percentage of these are too large and operationally inefficient. However, there just may be a silver lining.
Bank branches built decades ago need not be money pits. Rather, many branches within an institution’s network may very well have untapped value that could be converted into capital.
Just as retailers have come to realize the need to make structural changes to their business model in order to stay viable, banks need to do as well. In 2008 during the Great Recession, many banks divested branches or pursued sale-leasebacks as a hedge against volatility. Cash was raised and surplus brick-and-mortar assets were removed from their balance sheets. Today’s economic landscape looks and feels very different. However, we remain in a very low interest rate environment. Here are a few situations that may sound familiar:
You’re the CFO of a community bank. You have a dozen branches in your network, most of which are located in upper-middle class to affluent communities. The branches were opened at various times and lack visual continuity. Physical renovations are needed to stay relevant. A local real estate developer has always expressed interest in owning one of your branches. He happens to own an abutting parcel, and if he were to acquire the bank branch property, he could merge the lots and meet the requisite zoning dimensional regulations necessary to develop the property. The developer offers to pay a 6.75 percent cap rate on what would be a market NNN rent for the bank branch. The sale transaction nets a substantial amount of capital that will allow the bank to renovate its branches while still maintaining 50 years of control of its now leased branch. You also have a very happy developer client who needs a construction loan for his next-door project.
You’re the senior vice president of a regional bank with 45 branches that just acquired a small community bank. One of the branches is located within a community where your institution dominates. While this branch is well-located, the physical plant leaves much to be desired. It does not make financial sense to continue operating this branch. You determine through collecting market information that the site’s highest and best use is a fast-casual restaurant. You assemble a team of attorneys, civil engineers, architects and traffic engineers to permit the site. A fast-casual restaurant use requires a special permit from the planning board. The project also requires site plan review approval from the planning board. Once these entitlements are obtained, the project is shovel-ready. Due to the lack of permitting risk, there are a dozen of local developers that are clamoring to purchase the project.
You’re the CEO of a community bank that was founded 150 years ago in a Boston neighborhood. The bank’s original headquarters building is a magnificent building totaling 15,000 square feet. Despite its street presence, the building is functionally obsolete. The adjoining surface parking lot that was once critical is now largely unused. The bank’s real estate at this location is just shy of an acre and with the changing demographics of the neighborhood, luxury residential rental and for-sale property is in great demand. The bank engages an investment sales broker to market the property to residential multi-unit developers. A condition of the sale is that the developer must deliver a 2,500-square-foot, corner-position retail condominium on the first floor, the most visible location on the to-be-developed project. A sale and permitting process is completed and the purchaser begins construction. Since the project is phased, this allows the bank to relocate to its new branch without experiencing any down time. The substantial net proceeds of the sale allows the bank to create a new branch that is more economical, functional and appealing to bank staff and customers.
While some financial institutions had to complete sale-leasebacks in the Great Recession out of necessity, given the extreme demand for this type of product today, wouldn’t it be prudent to ask if your organization is currently sitting on a substantial amount of cash? Sale/leasebacks are one option; other options include selling your air rights or entering into a long-term ground lease. You may also sell your large parcel of land to a developer, who can then structure a condo arrangement so you can continue to own what you need to own to successfully operate your bank in the 21st century.
(1) American Bankers Association, “The Business of Banking.”
Richard Pilla is principal of Quincy-based Paramount Partners LLC.He may be reached at email@example.com. Joe Morrison is development manager at Paramount Partners. He can be reached at firstname.lastname@example.org.