# OCC Interpretive Letter No. 770: Permits a national bank to enter into leveraged lease of personal property which includes an incidental interest in real property under the newly revised 12 CFR Part 23. (02/10/97)

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0770

## Section

- **Citation:** OCC Interpretive Letter No. 770
- **Heading:** Permits a national bank to enter into leveraged lease of personal property which includes an incidental interest in real property under the newly revised 12 CFR Part 23. (02/10/97)
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Permits a national bank to enter into leveraged lease of personal property which includes an incidental interest in real property under the newly revised 12 CFR Part 23. (02/10/97)

## Text

Comptroller of the Currency
Administrator of National Banks
Washington, DC 20219
Interpretive Letter #770
February 10, 1997
March 1997
12 U.S.C. 24(7)2A
[ ]
12 U.S.C. 24(7)29A
[ ]
[ ]
[ ]
Dear [ ]:
This letter is written in response to your request of January 27, 1997, on behalf of [ ] (the
"Bank"), [city, state], for an opinion as to whether a certain facility leveraged lease transaction
would be permissible pursuant to 12 U.S.C. 24(Seventh) and the Office of the Comptroller of the
Currency's ("OCC") newly revised 12 CFR Part 23. For the following reasons, and subject to the
limitations discussed below, we conclude that the transaction, as described herein, would be
permissible under 12 U.S.C. 24(Seventh).
Background
You have represented that the leveraged lease transaction will be structured as follows. A trust
established by the Bank for its own benefit (“Owner Trust”) intends to purchase, for the fair
market value of approximately $140 million, a petrochemical facility (the "Facility"), comprised
of various equipment, fixtures and other personal property, from a multinational petrochemical
company (the “Company”). This purchase will be financed in part by an equity investment of
approximately $30 million which will be placed into the Owner Trust by the Bank. The Owner
Trust will raise, on the Bank's behalf, the remaining approximately $110 million of the purchase
price through a non-recourse debt offering. The Owner Trust will then purchase the Facility with
these funds and lease it back to an affiliate of the Company pursuant to a net, full payout lease
for a term of 20 years ("Facility Lease"). The Facility Lease will have an estimated residual value
of less than 25% of the cost of the Facility. At the expiration of the lease, the affiliate will have
the option to purchase the Facility
ffering. The Owner Trust will then purchase the Facility with
these funds and lease it back to an affiliate of the Company pursuant to a net, full payout lease
for a term of 20 years ("Facility Lease"). The Facility Lease will have an estimated residual value
of less than 25% of the cost of the Facility. At the expiration of the lease, the affiliate will have
the option to purchase the Facility.
The Bank, through the Owner Trust, will also lease from the Company various real property
interests, including property, easements and rights-of-way (the "Site"), necessary for the
operation of the Facility pursuant to a head ground lease ("Head GL"). The Owner Trust will
then sublease these interests to the affiliate of the Company pursuant to a sub-ground lease ("Sub
GL"). The rent obligation under the Head GL will be strictly contingent on, and exactly equal

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The Facility Lease and Sub GL, which both are 20 years in duration, are 8 years shorter in duration
1
than the Head GL. As a result, the Bank will bear the risk of the affiliate of the Company not exercising its
option to purchase the Facility upon the expiration of the Facility Lease. The Bank has represented that it must
take a longer durational interest in the Head GL to protect itself from this possibility. In order for the Facility to
be resold or released and the Bank to recoup its investment, the Bank must be able to convey an interest in the
Site to ensure the operability of the Facility. As mentioned earlier, the Bank is only obligated to pay rent under
the Head GL if the sublessee pays rent under the Sub GL. Because the Sub GL terminates after 20 years and the
Head GL terminates after 28 years, the sublessee will not be paying rent after year 20. Therefore, there will be no
rent obligation under the Head GL for the remaining eight years that it exists.
See 61 Fed Reg. 66554 (December 18, 1996).
2
to, the rent payment by the sublessee under the Sub GL and, thus, there will be no cost to the
Bank associated with the real property lease
20 years and the
Head GL terminates after 28 years, the sublessee will not be paying rent after year 20. Therefore, there will be no
rent obligation under the Head GL for the remaining eight years that it exists.
See 61 Fed Reg. 66554 (December 18, 1996).
2
to, the rent payment by the sublessee under the Sub GL and, thus, there will be no cost to the
Bank associated with the real property lease. The Head GL is for a term of approximately 28
years.1
The affiliate's performance of its obligations under both the Facility Lease and Sub GL is
guaranteed by the Company. In addition, the Facility Lease and Sub GL are cross-defaulted so
that a default under either agreement will give the Bank, through the Owner Trust, the
opportunity to operate the Facility in place and in use.
The Bank has represented that it is taking an interest in the Site for the sole purpose of protecting
its interest in the Facility in the event of a default. Although the Bank has stated that it could
protect its interest in the Facility by requesting a mortgage on the underlying Site from the
Company instead of taking a real property interest in it, it stated that to do so would put the Bank
at a competitive disadvantage since other potential lease financiers would not be hampered by
this regulatory restriction.
Discussion
a.
Personal Property Leasing
Lease financing transactions are addressed in the OCC's leasing regulation, 12 CFR Part 23.2
That regulation states that a bank may enter into lease financing transactions pursuant to two
separate statutory authorities: 12 U.S.C. 24(Seventh) or 12 U.S.C. 24(Tenth). You have
requested authority for this lease transaction under 12 U.S.C. 24(Seventh)
triction.
Discussion
a.
Personal Property Leasing
Lease financing transactions are addressed in the OCC's leasing regulation, 12 CFR Part 23.2
That regulation states that a bank may enter into lease financing transactions pursuant to two
separate statutory authorities: 12 U.S.C. 24(Seventh) or 12 U.S.C. 24(Tenth). You have
requested authority for this lease transaction under 12 U.S.C. 24(Seventh).
Section 23.3 of the OCC’s leasing regulation defines the general requirements for a conforming
personal property lease and provides that:
A national bank may acquire personal property for the purpose of, or in
connection with leasing that property, and may engage in activities incidental
thereto, if the lease qualifies as a full-payout lease and a net lease.

- 3 -
Id., at 66556.
3
12 CFR § 23.3. A “full-payout lease” is defined as a lease in which a national bank reasonably
expects to realize the return of its full investment in the leased property and the estimated cost
of financing the property over the term of the lease from rentals, estimated tax benefits and the
estimated residual value of the property. 12 CFR §23.2(e). The “net lease” requirement means
that the national bank will not, directly or indirectly, provide or be obligated to provide for,
among other things, servicing and repairs on the leased property or the payment of insurance for
the lessee. 12 CFR §23.2(f).
Subpart C of Part 23 further describes the rules governing a 24(Seventh) lease and provides that:
Pursuant to 12 U.S.C. 24(Seventh) a national bank may invest in tangible or
intangible personal property . . . for the purpose of, or in connection with leasing
that property, if the related lease is a conforming lease representing a
noncancelable obligation of the lessee (notwithstanding the possible early
termination of that lease).
12 CFR § 23.20(a). In addition, this subpart limits the estimated residual value of a lease
authorized under 12 U.S.C
nvest in tangible or
intangible personal property . . . for the purpose of, or in connection with leasing
that property, if the related lease is a conforming lease representing a
noncancelable obligation of the lessee (notwithstanding the possible early
termination of that lease).
12 CFR § 23.20(a). In addition, this subpart limits the estimated residual value of a lease
authorized under 12 U.S.C. 24(Seventh) to a maximum of 25% of the original cost of the
property unless the bank receives a guarantee for any excess residual value above that amount.
12 CFR § 23.21(a) and (b).
Based on your description of the proposed transaction, summarized above, as well as the
supporting documentation with which we have been provided, we conclude that the Facility
Lease is a conforming lease which complies with the above-mentioned requirements of 12 CFR
Part 23.
b.
Activities “Incidental to” Personal Property Leasing
Part 23, as recently revised, recognizes that a national bank may engage in activities that are
“incidental” to permissible personal property leasing. In the preamble to the final rule, the OCC
stated that it retained the authority to approve those activities on a case-by-case basis. In your
3
letter, you request that the OCC find that the acquisition of an interest in real property,
represented by the Head Ground Lease, is incidental to the Facility Lease.
You represent that the Bank’s obligation under the Head GL will not involve any real estate
construction or the acquisition or leasing of real property for the purpose of speculation. Rather,
the Bank is entering into the Head GL strictly in order to better protect the value and utility of the
financed equipment. The Head GL allows the Bank to sustain the value of the personal property
collateral in the event of default by ensuring the use of the Facility as a going concern rather than
requiring the piecemeal liquidation of the Facility if such Ground Lease did not exist.
on. Rather,
the Bank is entering into the Head GL strictly in order to better protect the value and utility of the
financed equipment. The Head GL allows the Bank to sustain the value of the personal property
collateral in the event of default by ensuring the use of the Facility as a going concern rather than
requiring the piecemeal liquidation of the Facility if such Ground Lease did not exist.

- 4 -
The OCC also requested comments on the use of real property as incidental to personal property
4
leasing, such as facility leasing, in its Notice of Proposed Rulemaking for Part 23. 60 Fed Reg. 46246, 46248
(September 6, 1995).
Real property leasing as an “incidental” activity was contemplated in the promulgation of the Part
23 leasing rule. In the preamble to the final rule, the OCC discussed a typical facility leasing
transaction and concluded that
4
... under some circumstances real estate leasing may be an incidental component
of a personal property leasing transaction. Therefore, consistent with its decision
to retain a case-by-case approach to activities incidental to leasing generally, the
OCC will determine the permissibility of personal property lease financing
transactions that have a real estate leasing component based upon the facts of a
given lease financing transaction . . . . This will enable the OCC to review any
safety or soundness or other supervisory concerns that particular transactions may
present.
61 Fed Reg. 66554, 66556 (December 18, 1996).
The primary concern in permitting a bank to become a party to a real property lease is the
restrictions imposed by 12 U.S.C. § 29 which states:
A national banking association may purchase, hold and convey real estate for the
following purposes, and for no others:
First
Such as shall be necessary for its accommodation in the transaction
of its business.
Second
Such as shall be mortgaged to it in good faith by way of security
for debts previously contracted
to a real property lease is the
restrictions imposed by 12 U.S.C. § 29 which states:
A national banking association may purchase, hold and convey real estate for the
following purposes, and for no others:
First
Such as shall be necessary for its accommodation in the transaction
of its business.
Second
Such as shall be mortgaged to it in good faith by way of security
for debts previously contracted.
Third
Such as shall be conveyed to it in satisfaction of debts previously
contracted in the course of its dealings.
Fourth
Such as it shall purchase at sales under judgments, decrees, or
mortgages held by the association, or shall purchase to secure debts
due to it.
But no such association shall hold the possession of any real estate under
mortgage, or the title and possession of any real estate purchased to secure any
debts due to it, for a longer period than five years except as otherwise provided in
this section.
12 U.S.C. § 29.

- 5 -
This proposed leasehold interest arguably is permissible under the actual wording of the statute.
5
Section 29 says that no bank may hold “possession” or “title and possession” of real estate. In this case, the bank
would have neither title to the property, nor actual possession of it during the term of the Facility Lease. At the
point that the bank might take possession of the property, i.e. upon termination of the Facility Lease, the bank
would be required to divest itself of its interest in the Head GL within 10 years.
See, Letter from Thomas DeShazo, dated July 8, 1974 (unpublished); Letter from Peter Liebesman,
6
dated March 13, 1990 (unpublished). But see, Interpretive Letter No. 556 [1991-92 Transfer Binder] ¶ 83,306
(August 6, 1991).
Although the Head GL runs approximately 8 years longer than the Facility Lease, the Bank has
7
indicated that the reason for this provision is to ensure the marketability of the Facility at the close of the Facility
Lease term
(unpublished); Letter from Peter Liebesman,
6
dated March 13, 1990 (unpublished). But see, Interpretive Letter No. 556 [1991-92 Transfer Binder] ¶ 83,306
(August 6, 1991).
Although the Head GL runs approximately 8 years longer than the Facility Lease, the Bank has
7
indicated that the reason for this provision is to ensure the marketability of the Facility at the close of the Facility
Lease term. If the remaining useful life of the Facility cannot be utilized because the real property on which it
sits no longer is transferable, then the Bank will be unable to sell or release the Facility after the Facility Lease
with the Company ends. As further evidence of its incidental nature, the Bank is under no obligation to pay rent
on the Head GL if the Sub GL lessee does not pay, including after the termination of the Facility Lease.
A threshold question raised by Section 29 is whether real property leasing was contemplated as
being within the purview of the statute. For the purposes of this analysis only, we assume that
a leasehold interest in real estate is subject to the restrictions of Section 29.5
The OCC has previously approved facility leasing transactions. However, our precedent in this
area has been inconsistent. Therefore, the OCC clarified its position when it revised Part 23.
6
As discussed above, Part 23 recognizes as permissible the incidental use of real property to secure
a bank’s interest in personal property that it is leasing, depending on the facts of a given case.
This position is predicated on the real property interests being, in fact, incidental to the primary
transaction - the personal property lease. The measure of what constitutes “incidental” will vary
in each case depending on the facts.
In the proposed transaction, several factors indicate that the Head GL is incidental to the Facility
Lease. First, the Bank need not advance any money for the Head GL because the Sub GL rent
amount exactly equals the rent amount due under the Head GL
the primary
transaction - the personal property lease. The measure of what constitutes “incidental” will vary
in each case depending on the facts.
In the proposed transaction, several factors indicate that the Head GL is incidental to the Facility
Lease. First, the Bank need not advance any money for the Head GL because the Sub GL rent
amount exactly equals the rent amount due under the Head GL. Because of these matched
obligations, there is no cost to the Bank for the Head GL as compared to the substantial cost to
it for the Facility Lease. Second, the Bank is under no legal obligation to pay rent under the Head
GL unless the affiliate of the Company pays rent under the Sub GL. Further, the Bank, through
its Owner’s Trust, only has a leasehold interest in the real property - not legal title. Its interest
in the real property is directly related to the amount of time it will take the Bank to recoup its
investment in the Facility, at which point its leasehold interest will expire. Finally, the Bank has
7
represented that its only purpose in entering into the Ground Lease is to ensure the value of the
equipment being leased under the Facility Lease.

- 6 -
For example, the Supreme Court in Union National Bank v. Matthews, stated that
8
[t]he object of [Section 29] was obviously threefold. It was to keep the capital of the banks
flowing in the daily channels of commerce; to deter them from embarking in hazardous real
estate speculations; and to prevent the accumulation of large masses of such property in their
hands, to be held, as it were, in mortmain.
98 U.S. 621, 626 (1878).
The Head GL is not inconsistent with any of the purposes underlying the restrictions of Section
29. The bank’s funds are not being removed from the channels of commerce because the Bank
8
will not be obligated to pay rent unless the sublessee under the Sub GL pays rent. There is no
speculation in the value of real estate because the amounts owing under the Head GL and the Sub
GL are identical
).
The Head GL is not inconsistent with any of the purposes underlying the restrictions of Section
29. The bank’s funds are not being removed from the channels of commerce because the Bank
8
will not be obligated to pay rent unless the sublessee under the Sub GL pays rent. There is no
speculation in the value of real estate because the amounts owing under the Head GL and the Sub
GL are identical. Finally, no large mass of real estate will be accumulated or held by the Bank
as the Bank is limited to a leasehold interest in the Site.
In addition, the proposed transaction proposes no immediate safety and soundness concerns. The
payment of rent on the Sub GL is guaranteed by the Company. Further, as mentioned earlier, the
Bank is under no obligation to pay on the Head GL unless the affiliate pays on the Sub GL.
Finally, the Bank has built into the Facility Lease and the Head GL a cross-default provision
which would allow the Bank to operate the Facility if there were a default under either agreement.
This provision would insulate the Bank from the possibility of having to disassemble the Facility
and liquidate it in the event of default.
Therefore, for the reasons already stated, and based on the representations made to us, as
summarized herein, we conclude that this facility leveraged lease transaction is permissible under
12 U.S.C. 24(Seventh). However, the Bank must at all times comply with the conditions set out
in 12 CFR Part 23, including the requirement to divest of any off-lease interests within the
appropriate divestiture period.
I trust this has been responsive to your inquiry.
Very truly yours,
/s/
Julie L. Williams
Chief Counsel

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0770. Check the current official text before relying on it. Not legal advice.