Letter concludes that it would be permissible under 12 USC 29 for bank to enter into a long-term ground lease with unrelated third party of property that it has owned and used as bank premises for three decades.

O

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #1072

September 15, 2006 October 2006

12 USC 29

Re:

Bank Premises Proposal

Dear [ ]:

This is in response to your inquiry on behalf of [ ],

[ City, State ] (“Bank”), concerning the authority of national banks to lease to a third

party an existing parcel of bank premises property. For the reasons discussed below, we believe

that the Bank’s proposal is permissible under 12 U.S.C. § 29 and is consistent with our

precedent.

I.

Background

The Bank owns a parcel of land in [ City, State ], as bank premises property

(the “[ ] Premises”). The [ ] Premises covers 1.82 acres (approximately

79,000 square feet) and includes a 4,300 square foot free-standing bank branch, surface parking

for bank customers and employees, and landscaping. The Bank has operated the full-service

branch on the [ ] Premises since 1974, and the Bank represents that its current

branch building, now over 30 years old, needs to be replaced.

Concurrent with its need for a new, modern branch building, the Bank proposes to make

a more productive use of the [ ] Premises. Specifically, the Bank proposes to enter

into a long-term ground lease with an unaffiliated, third-party developer for the [ ]

Premises. On the parcel, the third-party lessee would construct a new full-service bank branch

building for the Bank and sublease the building to the Bank at no cost. In addition, the third-

party lessee would create surface parking for bank customers and employees

Bank proposes to enter

into a long-term ground lease with an unaffiliated, third-party developer for the [ ]

Premises. On the parcel, the third-party lessee would construct a new full-service bank branch

building for the Bank and sublease the building to the Bank at no cost. In addition, the third-

party lessee would create surface parking for bank customers and employees. To maximize the

utility of the overall parcel, the third-party lessee also would construct a facility with

approximately 17,000 square feet of space that would house a limited number of retail

businesses.1 The Bank would receive annual, fixed lease payments from the third-party lessee.

1 Neither the Bank nor its holding company or any of its affiliates would participate in the

development, construction, financing, ownership, or operation of the retail space.

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It is anticipated that the ground lease would run for 40 years. At the end of the term, if the lease

is not renewed, title to all improvements made upon the [ ] Premises would revert to

the Bank. Following the reconfiguration of the property, it is expected that approximately 50%

of the [ ] Premises would be used by the Bank for its banking business.

The Bank believes that its proposal for the [ ] Premises would benefit the

Bank in several ways. First, the Bank would have a new, modern, and more efficient branch

facility, which would better position the Bank to compete with competitors entering the market.

Second, the Bank would maximize the utility of the [ ] Premises, thereby generating

lease income which would enhance the Bank’s cash flow. Third, the presence of the retail

businesses would generate more traffic to the location, from which the Bank may generate new

business.

II

ility, which would better position the Bank to compete with competitors entering the market.

Second, the Bank would maximize the utility of the [ ] Premises, thereby generating

lease income which would enhance the Bank’s cash flow. Third, the presence of the retail

businesses would generate more traffic to the location, from which the Bank may generate new

business.

II.

Discussion

A national bank’s authority to own real estate is governed by 12 U.S.C. § 29. Section

29(First) provides that a national bank may purchase, hold, and convey such real estate “as shall

be necessary for its accommodation in the transaction of its business.” The limitations of section

29 are designed “to keep the capital of the banks flowing in the daily channel 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 ....”2 Consistent with section 29,

the bank’s activities must be conducted in good faith, that is, for banking purposes and not in an

effort to avoid the limitations of section 29.3

For over three decades, the Bank has held the [ ] Premises and has used it in

good faith for the accommodation of its banking business. Clearly, the [ ] Premises

is permissible bank premises. Once a national bank has acquired a parcel in good faith for the

legitimate business reason of accommodating its banking business, the bank may make the best

economic use of the property consistent with the accommodation of its business. In Brown v.

Schleier, 118 F. 981 (8th Cir. 1902), aff’d, 194 U.S

king business. Clearly, the [ ] Premises

is permissible bank premises. Once a national bank has acquired a parcel in good faith for the

legitimate business reason of accommodating its banking business, the bank may make the best

economic use of the property consistent with the accommodation of its business. In Brown v.

Schleier, 118 F. 981 (8th Cir. 1902), aff’d, 194 U.S. 18 (1904), the court stated:

If the land which [a national bank] purchases or leases for the accommodation of its

business is very valuable, it should be accorded the same rights that belong to other

landowners of improving it in a way that will yield the largest income, lessen its own

rent, and render that part of its funds which are invested in realty most productive.

2 Union Nat’l Bank v. Matthews, 98 U.S. 621, 626 (1878).

3 Interpretive Letter No. 1045, reprinted in [Current Transfer Binder] Fed. Banking L. Rep.

(CCH) ¶ 81-573 (December 5, 2005); Interpretive Letter No. 1044, reprinted in [Current Transfer Binder]

Fed. Banking L. Rep. (CCH) ¶ 81-572 (December 5, 2005); Interpretive Letter No. 1034, reprinted in

[Current Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-563 (April 1, 2005); Conditional Approval

No. 298 (December 15, 1998); Interpretive Letter No. 758, reprinted in [1996-1997 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 81-122 (April 5, 1995); Interpretive Letter No. 1043, reprinted in [Current

Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-571 (July 8, 1993); Interpretive Letter No. 1042,

reprinted in [Current Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-570 (January 21, 1993).

o. 298 (December 15, 1998); Interpretive Letter No. 758, reprinted in [1996-1997 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 81-122 (April 5, 1995); Interpretive Letter No. 1043, reprinted in [Current

Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-571 (July 8, 1993); Interpretive Letter No. 1042,

reprinted in [Current Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81-570 (January 21, 1993).

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There is nothing, we think, in the national bank act, when rightly construed, which

precludes national bank, so long as they act in good faith, from pursing the policy

above outlined.

The basic requirement, therefore, is that the bank’s activities must be conducted in good

faith, that is, for banking purposes and not in an effort to violate 12 U.S.C. § 29. And, once land

is owned appropriately by a national bank, better utilization thereof is also permissible under

section 29.4 The Brown decision continued:

The [National Bank Act] ought not to be construed in such a way as to compel a

national bank, when it acquires real property for a legitimate purpose, to deal with it

otherwise than a prudent landowner would ordinarily deal with such property.

Brown, 118 F. at 984.

In Interpretive Letter No. 758, supra, the national bank owned as bank premises an

expanse of parkland that it used for employee recreation and bank promotion. The bank inquired

whether it could lease a portion of the bank premises to a third-party mining company for that

company to remove granite deposits from the leased acreage. We concluded that the national

bank could lease a portion of real estate held as bank premises to a third party so long as doing so

did not impinge on the bank’s use of the parcel for its banking business.

It is consistent with Section 29, therefore, to lease out portions of a real estate parcel

owned by the bank and used in part for bank premises in order to obtain maximum

return from the property

uded that the national

bank could lease a portion of real estate held as bank premises to a third party so long as doing so

did not impinge on the bank’s use of the parcel for its banking business.

It is consistent with Section 29, therefore, to lease out portions of a real estate parcel

owned by the bank and used in part for bank premises in order to obtain maximum

return from the property. The law allows this use when the property remains

undivided and assumes that ownership of the entire parcel is for the accommodation

of the Bank’s business.

The authority to make a better utilization of bank premises property is subject to the

bank’s continued good faith use of the premises for a legitimate business reason. Under the

Bank’s proposal, the Bank would continue to use the [ ] Premises in good faith for

the accommodation of its banking business. It is expected that approximately 50% of the

premises would be used by the Bank for its banking business.5 The Bank would maximize the

utility of the [ ] Premises by permitting the lessee to construct a facility to house

4 E.g., Interpretive Letter No. 1043, supra.

5 The OCC looks to the percentage of use or occupancy of property in conjunction with the

bank’s business as a measure of good faith use of the property for banking purposes. See, e.g.,

Interpretive Letters No. 1045 and 1044, supra. The Bank’s expected percentage use of the [ ]

Premises exceeds what has been expressly permitted in the case law on bank premises. See, e.g., Wingert

v. First Nat’l Bank, 175 F. 739 (4th Cir. 1909), appeal dismissed, 223 U.S. 670, 672 (1912) (upholding

bank’s authority to tear down bank building and construct new six story office building in which bank

will occupy only first floor, or 16.7 percent of structure); Wirtz v. First Nat’l Bank & Trust Co., 365 F.2d

641, 644 (10th Cir

permitted in the case law on bank premises. See, e.g., Wingert

v. First Nat’l Bank, 175 F. 739 (4th Cir. 1909), appeal dismissed, 223 U.S. 670, 672 (1912) (upholding

bank’s authority to tear down bank building and construct new six story office building in which bank

will occupy only first floor, or 16.7 percent of structure); Wirtz v. First Nat’l Bank & Trust Co., 365 F.2d

641, 644 (10th Cir. 1966) (recognizing bank’s authority to occupy 20.7 percent of office complex and

lease remaining space as excess premises).

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retail businesses on the remainder of the parcel. In doing so, the Bank’s proposal also would

benefit the Bank’s business: a new, modern, more efficient branch facility would enable the

Bank to compete more effectively with new competitors entering the market; more foot traffic to

the location would offer the Bank the opportunity to generate new customers and more business;

and the lease itself would generate a stream of lease income to the Bank.

Moreover, the Bank’s proposal is not inconsistent with purposes behind restrictions in

section 29.6 The Bank already owns the [ ] Premises, so it would not have to

expend funds to acquire the property. Because the Bank only would lease the property to a third

party, the Bank would not expend funds to develop or construct the retail space. Thus, no

additional capital is removed from the daily flows in the channels of commerce, and capital (in

an amount equal to annual lease income) is returned to the channels of commerce. The Bank

already owns the [ ] Premises and would enter into a long-term lease with fixed

lease payments, so the Bank could not be said to be speculating in real estate. Because the Bank

already owns the parcel, it would not acquire any additional real estate; thus, it would not be

accumulating large masses of real estate

se income) is returned to the channels of commerce. The Bank

already owns the [ ] Premises and would enter into a long-term lease with fixed

lease payments, so the Bank could not be said to be speculating in real estate. Because the Bank

already owns the parcel, it would not acquire any additional real estate; thus, it would not be

accumulating large masses of real estate. Finally, the Bank’s proposal would not result in the

Bank’s holding any real estate other than the [ ] Premises and, because banks are

permitted to hold bank premises indefinitely, the Bank could not be said to be holding any

impermissible (i.e., non-premises) real estate in mortmain.

III.

Conclusion

Based upon the information and representations you provided, we find that the Bank’s

proposal is permissible under 12 U.S.C. § 29 and is consistent with our precedent. A material

change in the facts may result in a different conclusion. If you have any questions, please

contact Steven V. Key, Counsel, Bank Activities and Structure Division, at 202-874-5300.

Sincerely,

/s/

Julie L. Williams

First Senior Deputy Comptroller

and Chief Counsel

6 See footnote 2 and accompanying text.