# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

#### December 5, 2005 Interpretive Letter #1044

**December 2005**

#### 12 USC 29

> Re: Bank Premises Proposal from **\[ *Bank, City, State* \]**

Dear **\[ \]**:

This is in response to your request for a legal opinion addressing the
proposal by **\[ *Bank, City, State* \]** ("Bank"), to develop a new,
mixed-use office building adjacent to the Bank's current headquarters
buildings in **\[ *City* \]**. The Bank would use and hold the building
as bank premises. For the reasons discussed below and based upon the
representations made by the Bank, we find that the Bank's proposal is
permissible under 12 U.S.C. § 29.

## 

## Bank's Proposal

The Bank's corporate headquarters complex currently consists of two
adjacent office buildings that occupy a portion of one city block in
downtown **\[ *City* \]**. The Bank uses 100% of the space in the first
building and approximately 92% of the space in the second building. In
addition, the Bank leases substantial office space in other nearby
office buildings. The Bank's various leases for this office space start
expiring in 2013.

The Bank now proposes to construct a third building ("Proposed
Premises") to provide the Bank with additional office space in an
expanded headquarters complex. The Bank expects that the office space in
the Proposed Premises would provide the Bank with ability to move Bank
employees from the leased office space in the nearby buildings to the
Bank's headquarters complex. In addition, the Bank anticipates that at
least one of its current headquarters complex buildings likely will
undergo renovations in the coming years, and the Proposed Premises would
provide the Bank with office space for employees displaced by the
renovations.

The Proposed Premises would be built adjacent to the Bank's current
office buildings and on property currently held by the Bank as bank
premises. The Bank anticipates that development

of the Proposed Premises would commence in early 2006, with completion
targeted for early 2009.[^1]

For the reasons described below, the Bank proposes that the Proposed
Premises would be a mixed-use building. As proposed, the building would
have ground level retail and restaurant space, twelve floors of office
space totaling approximately 360,000 square feet, five floors of hotel
space (158 rooms), and four floors of condominiums (32 units). The
condominiums would be sold through an unaffiliated real estate broker
and, once sold, the Bank would retain no ownership interest in the top
four floors of the building.[^2]

Once the Proposed Premises is completed, the Bank initially expects to
occupy a small percentage of the office space.[^3] As the Bank's leases
expire in other office buildings and as the Bank renovates one or both
of the current buildings, the Bank anticipates moving additional
employees into the Proposed Premises. In the years immediately following
the expiration of the Bank's leases in other office buildings, the Bank
projects that it would occupy approximately 100,000 square feet of
office space in the Proposed Premises, or approximately 25% of the
available office space. Over time, the Bank anticipates that its
occupancy of office space in the Proposed Premises may increase.

With respect to the hotel space, the Bank would contract with a national
hotel management company to manage and operate the hotel on a day-to-day
basis. The hotel would be of a business class quality appropriate for
and competitive in downtown **\[ *City* \]**.[^4] The Bank would place a
substantial majority of its visiting employees, officers, directors, and
customers in the hotel and would commit to occupying a certain number of
room-nights per year in the hotel. Based on its 2004 figures, the Bank
projects that it would occupy approximately 10% of the room-nights
available in the hotel on a yearly basis and that, during certain times
throughout the year, the Bank may occupy a larger percentage of the
rooms. In addition, the Bank will make use of the hotel's conference
facilities when it requires additional meeting space or off-site meeting
space.[^5]

The Bank's decision to develop the Proposed Premises as a mixed-use
building is driven by two factors. First, the Bank believes that the
specific combination of office, hotel, and residential space described
above is the combination of uses that makes the building economically
viable in the downtown **\[ *City* \]** market. For example, revenue
generated from including a hotel and selling the condominiums is
important to financing the construction of the building, and several of
the state and local economic benefits are related to one or more of the
mixed uses.

Second, the Bank views the Proposed Premises as an important part of a
rejuvenation effort for downtown **\[ *City* \]**. Such an effort
benefits the Bank by protecting the value of the Bank's current
headquarters buildings and enhancing the Bank's brand and image,
especially in light of the fact that the to-be-developed lots currently
have run down, dilapidated buildings. In addition, complementary
development by unrelated third parties may take place in the block
across the street from the Proposed Premises.

## 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." Consistent with
section 29, the bank's activities must be conducted in good faith, that
is, for banking purposes and not in a speculative manner. Section 29's
limitations are designed "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."[^6]

However, section 29 does not prohibit a national bank from owning or
leasing a building larger than its current needs dictate. Both the
OCC[^7] and the courts[^8] have recognized that it is appropriate for a
bank to maximize the utility of its banking premises. For example, in
*Brown v. Schleier*, 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. There is nothing, we think, in the national bank act, when
> rightly construed, which precludes national banks, so long as they act
> in good faith, from pursuing the policy above outlined. *Id. at 984.*

The basic requirement, therefore, is that the Bank's development of the
Proposed Premises must be done in good faith, that is, for banking
purposes and not in an effort to violate section 29. Once the banking
purposes have been established, section 29 permits the Bank to maximize
utilization of the Proposed Premises. The *Brown* decision continued:

> When an occasion arises for an investment in real property for either
> of the purposes specified in the statute, the national bank act
> permits banking associations to act as any prudent person would act in
> making an investment in real estate, and to exercise the same measure
> of judgment and discretion. The 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. *Id.*

National banks may maximize the utility of their banking premises by
leasing excess premises to third parties.[^9] In addition the OCC
previously has concluded that, consistent with section 29, a national
bank may develop a bank premises building and sell some of the excess
space (in contrast to leasing all of the excess space).[^10]

In this instance, we conclude that the Bank is acting in good faith. The
property upon which the Bank would develop the Proposed Premises
currently is held by the Bank as bank premises. Given the Bank's near
total use of its current headquarters buildings and the upcoming
expiration of leases for substantial space in other buildings, the Bank
has a demonstrated need for additional office space. The Bank expects
that it would start moving Bank employees into the Proposed Premises
immediately prior to the expiration of its existing leases, with the
Bank anticipating that shortly thereafter it would occupy at least 25%
of the office space.[^11] Moving Bank employees from leased space into
the Bank's headquarters complex would reduce the Bank's annual expenses
to lease office space elsewhere and to transport employees between the
current headquarters buildings and the leased office space.

The Bank also has established that development of the Proposed Premises
as a mixed-use building is necessary to make such development
economically viable in the downtown **\[ *City* \]** market. Revenue
generated from including a hotel and selling the condominiums is
important to financing the construction of the Proposed Premises, and
several of the state and local economic benefits are related to the
inclusion of one or more of the mixed uses. Moreover, the Bank believes
that the mixed use nature of the Proposed Premises will aid in the
rejuvenation of downtown **\[ *City* \]**, which in turn would protect
the value of the Bank's current headquarters buildings. The Proposed
Premises also is consistent with development that may take place in the
block across the street from the Bank's headquarters.

With respect to the hotel, the Bank has demonstrated both a need to
include hotel space in the Proposed Premises and a need for such space
to lodge its visiting employees, officers, directors, and customers.
Given these needs, the Bank does not propose to create more hotel space
than is consistent with legitimate banking purposes. The size of the
hotel, at 158 rooms, is driven by conclusions derived from an analysis
of the downtown **\[ *City* \]** market. In addition, the Bank
anticipates using approximately 10% of the hotel's room-nights annually
and, periodically as a result of the Bank's business, the Bank
anticipates that its visitors may occupy a larger percentage of the
hotel's rooms.[^12]

Overall, the Bank anticipates that it would occupy approximately 22% of
the office and hotel space in the Proposed Premises. This level of usage
exceeds what has been expressly permitted in the case law on bank
premises. Therefore, under these circumstances, we find that the Bank
may lease the excess office and hotel space to third parties in order to
maximize the utility of its premises.[^13]

With respect to the four floors of condominiums that the Bank would
sell, the Bank represents that including the development of these
condominiums for sale is necessary to make construction of the Proposed
Premises economically viable. As discussed above, once bank premises
property is acquired in good faith, national banks should be treated
like any other landowner and permitted to make best economic use of
property. If including the condominiums is necessary to the economic
viability of the development of the Proposed Premises, then their
construction and sale should not be prohibited by 12 U.S.C. § 29.[^14]
Indeed, when viewed in light of the purposes underlying section 29,[^15]
it seems reasonable to conclude that the sale of excess space in the
Proposed Premises also is consistent with these enunciated purposes.
Such a sale of excess space would enable the Bank to keep its capital
flowing in commerce and would reduce the amount of property held by the
Bank "in mortmain."

#### Conclusion

Based upon the information and commitments you provided, we find that
the Bank's proposal to develop the Proposed Premises is consistent with
12 U.S.C. § 29. If you have any

questions, please contact Steven V. Key, Senior Attorney, Bank
Activities and Structure Division, at 202-874-5300.

Sincerely,

**signed**

Julie L. Williams

First Senior Deputy Comptroller

and Chief Counsel

[^1]: The Bank is authorized to invest in bank premises under 12 U.S.C.
    § 371d and 12 C.F.R. § 5.37. The Bank does not need to file an
    application or notice with the OCC because its aggregate investment
    in bank premises does not approach the amount of the Bank's capital
    stock and surplus. *See* 12 U.S.C. § 371d(a)(2) and 12 C.F.R. §
    5.37(d)(1). As of September 30, 2005, the Bank's aggregate
    investment in bank premises was approximately \$1.2 billion, and the
    Bank's capital and surplus was approximately \$6.3 billion.

[^2]: The Bank employed a real estate consulting group to study the
    market for residential condominiums in downtown **\[ *City* \]**.
    The consulting group concluded that the downtown market would
    support between 28 and 36 residential condominiums as part of the
    Proposed Premises and that all condominiums would be sold within two
    to three years of completion of a model sales unit.

[^3]: The Bank has an informal agreement with a prospective tenant for
    that tenant to occupy five of the twelve floors of office space. The
    Bank would have a right of first refusal to lease the remaining
    office space.

[^4]: The Bank hired a hospitality consulting firm to study the hotel
    market in downtown **\[ *City* \]**. The consulting firm concluded
    that the downtown market would support a business class hotel with
    approximately 160 rooms and that such hotel would achieve, and
    thereafter maintain, an occupancy rate of 72% -- the industry
    standard -- within three years of operation.

[^5]: The Bank anticipates that its percentage usage of the hotel's
    conference facilities would be consistent with its percentage usage
    of the hotel's rooms.

[^6]: *Union Nat'l Bank v. Matthews*, 98 U.S. 621, 626 (1879).

[^7]: *E.g.,* Interpretive Letter No. 1034, *reprinted in* \[Current
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-563 (Apr. 1,
    2005).

[^8]: *Brown v. Schleier,* 118 F. 981 (8th Cir. 1902), *aff'd*, 194 U.S.
    18 (1904); *Perth Amboy Nat'l Bank v. Brodsky*, 207 F. Supp. 785,
    788 (1962).

[^9]: Interpretive Letter No. 1034, *supra* (bank to lease approximately
    78 percent, and possibly as much as 89 percent, of space in bank
    premises to third parties); Conditional Approval No. 298 (Dec. 15,
    1998) (bank to lease as much as 75 percent of space to third
    parties).

[^10]: OCC Interpretive Letter (Aug. 14, 1985) (published in
    Lexis-Nexis) (under section 29, bank permitted to develop portion of
    new bank building as office condominiums and sell the condominiums).

[^11]: Bank premises includes real estate held for use as future bank
    premises. *See* 12 C.F.R. § 7.1000. Twelve C.F.R. § 34.84 provides
    that a national bank "*normally* should use real estate acquired for
    future bank expansion within five years." (emphasis added) The
    language of section 34.84 suggests a degree of flexibility in the
    timeframe for use of future bank premises. For example, there may be
    a need to permit a bank to construct a building, then immediately
    lease most of the space for non-bank tenants but to occupy an
    increasing percentage of the building over the useful life of the
    building. *Compare* 12 C.F.R. 7.5004(b)(2) (excess electronic
    capacity based on future anticipated growth).

[^12]: OCC Interpretive Letter, dated July 8, 1993 (to be published)
    (national bank that permissibly maintains residential condominium as
    lodging for use of visiting auditors, consultants, and customers may
    rent condominium when not being used by such visitors as means of
    offsetting lodging's expenses); OCC Interpretive Letter, dated
    January 21, 1993 (to be published) (given scarcity and cost of other
    commercial lodging, bank may maintain residential condominium for
    use of outside consultants, auditors, and customers).

[^13]: *See* note Error: Reference source not found, *supra.*

[^14]: *See* note Error: Reference source not found, *supra,* and
    accompanying text.

[^15]: *See* note Error: Reference source not found, *supra,* and
    accompanying text.