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Legal Opinion Summary
Topic:Leasing Real Property: May a Farm Credit System association lease excess office space to an unrelated entity engaged in providing risk management and insurance services to the general public?
ID Number:98-09
Issue Date:12/29/1998

A farm credit bank (on behalf of an affiliated association (association)) asked whether the Farm Credit Act (Act) and FCA regulations permit the association to lease excess office space to an unrelated entity engaged in providing risk management and insurance services to the general public (the Agency). The bank indicated that the parties would enter into a “performance lease,” in which the leasing rate would be based on the success of the Agency’s sales effort. The association would provide some administrative support services to the Agency, but its employees would not engage in providing risk management or insurance services. OGC concluded that the association may enter into this arrangement pursuant to its authority under the Act to exercise “all the usual incidents of ownership of real . . . property necessary or convenient to the business of the association.” See Act §§ 2.2(5) (12 U.S.C. § 2073(5)) (production credit associations), 2.12(5) (12 U.S.C. § 2093(5)) (Federal land bank associations/Federal land credit associations).

In examining this issue, OGC reviewed interpretations by federal courts and the Office of the Comptroller of the Currency (OCC) of a similar provision of the National Bank Act. The National Bank Act authorizes a national bank, in pertinent part, to “purchase, hold, and convey real estate . . . as necessary for its accommodation in the transaction of its business.” 12 U.S.C. § 29 (First). Both courts and the OCC have long held that this provision authorizes national banks to lease or construct a building for banking purposes, even though it intends to occupy only a part thereof and to rent out a large portion of the building to others, as long it has a good faith purpose -- that is, the purpose must not be to speculate in real estate for a profit. Leasing excess space allows a bank to make the most economical and efficient use of its property. The OCC has authorized banks to lease space to insurance agents on terms that are “usual and customary” in the leasing of commercial office space, including rates that are based on the volume of sales or gross income. The OCC has also allowed bank employees to provide administrative support services to bank tenants.

This analysis is equally applicable to Farm Credit System associations. Although the FCA has issued no regulations on this subject, associations must conduct themselves so as to prevent customer confusion as well as safety and soundness violations. Associations should ensure that their lessees’ businesses are clearly and separately identified, that operations or assets are not commingled, and that security and other safety and soundless issues are resolved.

(December 29, 1998)