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Legal Opinion Summary
Topic:Use of Property/Eligibility: May an agricultural credit association make a loan to an ineligible commercial real estate developer for construction of a small office building to be leased back to the association?
ID Number:99-02
Issue Date:01/07/1999

An agricultural credit association (ACA) asked if it could make a loan to an ineligible commercial real estate developer who would construct a small office building and then lease it back to the association. The ACA would be the sole tenant in an office building that would meet its business needs for the foreseeable future. The developer would use the loan proceeds only to build, maintain, and service the building for the association. The association would finance no other commercial construction projects for this developer. OGC concluded this transaction meets the requirements of the Act and applicable regulations.

Sections 2.2(5) and 2.12(5) of the Farm Credit Act (Act) (12 U.S.C. 2073(5) and 2093(5)) and 12 C.F.R. 615.5170 authorize these types of transactions. More specifically, associations have authority under these two provisions of the Act to “acquire, hold, dispose, and otherwise exercise all of the usual incidents of ownership of real and personal property necessary or convenient to the business of the association.” According to 615.5170, “the purchase, lease, or construction of office quarters shall be limited to facilities reasonably necessary to meet the foreseeable requirements of the institution.” This regulation also prohibits associations from acquiring property that involves a Farm Credit System bank or association in the real estate or other unrelated business.

The office building that the association wants to finance and lease is necessary for its normal business operations. The association will not become involved in a business that is unrelated to agricultural credit. Sections 2.2(5) and 2.12(5) of the Act and 615.5170, not the eligibility rules, apply to this transaction.

(January 7, 1999)