SALE-LEASEBACKS: How the nation's largest financial institutions have sold and leased back their branches

Financial institutions all face similar challenges to the real estate industry at large: What to do with buildings where they no longer need all the space? Finding a buyer for significant square footage seems daunting. And, when a bank or credit union closes a branch, it reduces the value of the real estate. Now, banks like BMO Financial are using a unique strategy to preserve their presence in the community and the value of their real estate — and they're coming out ahead in all important areas of both the balance sheet and income statement.

Branch sizes, and real estate usage generally, just aren’t the same as before 2020. A 10,000-square-foot branch with offices above street level may have made sense then. Now, at its current size, it may be too expensive, even when it still serves as a high-value location for consumers who are inquiring about new products or closing on consumer and commercial loans.

Instead of surrendering to a lose-lose set of options, BMO Financial formulated a better strategy: sell the branch building to a real estate management company and lease back a portion for a smaller branch footprint. Usually, with a renovation, you can expect to see somewhere between a 5 to 10% increase in deposits over the next three or four years. In the branches that BMO did the sale and partial leaseback, they all exceeded those measures.

Over the past five years, BMO Financial has participated in a sale leaseback transaction on 36 branches for approximately $450M. This success has been further reinforced through many leaders in the financial industry, including authoring articles published in BAI Strategies and The Financial Brand, as well as through podcasts, webinars, and speaking engagements, seeming to be top of mind for many. While other real estate companies, hedge funds, and investment groups approach branch sale-leasebacks from a purely transactional standpoint, there is a very structured approach that is centered on long-term benefits for both parties. 

It seems as though there are four emerging trends affecting financial institutions driven by macroeconomic factors such as mobile banking options, COVID-19 impacts, and fluctuating interest rates:

1. Capital Needs: Higher interest rates mean a need for increased capital reserves and liquidity. Sale-leaseback transactions offer a more efficient way to raise capital without diluting shareholder value.
   
   
2. Operational Effectiveness: The competitive landscape and need for cost savings have pushed banks and credit unions to focus on core operations, making the monetization and outsourcing of real estate services attractive.
   
   
3. Co-Tenancy Opportunities: Financial institutions are increasingly interested in co-tenancy opportunities within or adjacent to their branches, including build-to-suit developments.
   
   
4. All-Inclusive Real Estate Solutions: Banks and credit unions seek full-service real estate solutions, including sale-leaseback transactions, build-to-suit projects, disposition of closed branches, property management, downsizing of branch footprints and co-tenancy opportunities. As with any strategic decision, you need to weigh all the options and how they will impact the net increase in capital, as well as project its ongoing operating expenses.