June 28, 2006

Michael D. Lozoff, Esq.

Adorno & Yoss, LLP

2525 Ponce De Leon Blvd., 4^th^ Floor

Miami, FL 33134

Re: Permissibility of an FCU Developing Residential Property to

Lease to Employees for Housing.

Dear Mr. Lozoff:

You have asked if a federal credit union (FCU) can convert excess credit
union property into residential housing that it would lease to its
employees. No, FCUs have neither express authority nor is it within
their incidental powers to engage in this activity.

The background for your inquiry is that an FCU would like to offer
residential housing to its employees due to high area real estate prices
in the area where the FCU has its offices. The FCU wants to develop
excess credit union property by converting it into residential rental
units. It would then lease units to employees and charge below market
rates. The intent of the proposal is to attract employees to positions
at the FCU by making affordable rental housing available near the FCU.

You believe the activity might be permissible by knitting together
certain provisions in the FCU Act and NCUA's regulations, but we
disagree. An FCU may only engage in activities that the FCU Act
expressly authorizes or that fall within an FCU's incidental powers.

In support of your contention, you note the provision in the FCU Act
expressly authorizing an FCU "to purchase, hold, and dispose of property
necessary or incidental to its operations." 12 U.S.C. §1757(4). FCUs are
financial institutions and, by its terms, this express, statutory
authority only permits FCUs to own property related to an FCU's
"operations," which is providing financial products and services to
members. We conclude this express power does not authorize FCUs to
engage in the business of developing property it owns into residential
rental property or to be in the business of leasing residential
property, even where the property is leased on a subsidized basis to its
employees.

Further, the activity is not contemplated as a category of incidental
powers. Although the proposed activity involves excess property, it is
not within the preapproved incidental powers category of excess
capacity. 12 C.F.R. §721.3(d) ("Excess capacity is the excess use or
capacity remaining in facilities . . . invested in or established, in
good faith, with the intent of serving your members . . . \[and\] will
be taken up by the future expansion of services to members"). We have
also considered if the proposed activity could be considered with the
general, regulatory definition of an incidental powers activity.

> An activity meets the definition of an incidental power activity if
> the activity: (a) Is convenient or useful in carrying out the mission
> or business of credit unions consistent with the \[FCU\] Act; (b) Is
> the functional equivalent or logical outgrowth of activities that are
> part of the mission or business of credit unions; and (c) Involves
> risks similar in nature to those already assumed as part of the
> business of credit unions.

12 C.F.R. §721.2. The FCU's proposal to develop and maintain residential
property for lease to its employees is not part of the mission or
business of credit unions. Residential real estate development and
leasing is a separate, unrelated business line from the mission of FCUs
to provide financial products and services to members. In addition, the
rental real estate business has different risks and liabilities than
those credit unions assume as part of their business. As proposed, the
FCU would be its employees' landlord, resulting in financial and legal
obligations separate from the employment relationship and with very
different risks and liabilities.

You identified two NCUA regulations you believe support the
permissibility of the proposed activity; however, since the FCU Act does
not authorize developing and leasing residential property as either an
express or incidental power, it likewise would not be permissible under
NCUA's regulations. Nevertheless, we considered your contention that
residential rental property might be considered "premises," as used in
the fixed asset rule and, also, that the CUSO rule provides a
permissible basis for the activity.

NCUA's fixed asset rule permits FCUs to invest in real property used or
is intended to be used as premises, but residential rental units for FCU
employees do not fall within the definition of "premises." 12 C.F.R.
§701.36(e)(4)(i). The regulation defines premises to mean "any office,
branch office, suboffice, service center, parking lot, other facility,
or real estate where the credit union transacts or will transact
business." 12 C.F.R. §701.36(e)(6). Rental housing for employees would
not be property where the FCU conducts business and the fixed asset rule
provides no support for the proposal.

Likewise, the NCUA's credit union service organization (CUSO) rule does
not provide a regulatory basis or means for an FCU to engage in
residential real estate leasing to provide housing for its employees.
You identified the provision in the CUSO rule permitting CUSOs to engage
in "real estate leasing of excess CUSO property" as basis for the
proposal. 12 C.F.R. §712.5(i)(2). First, we note that each identified
preapproved activity and service in the CUSO rule must be one "related
to the routine daily operations of credit unions." 12 C.F.R. §712.5. As
discussed above, we do not consider leasing residential real estate to
employees as part of the daily operations of credit unions. In addition,
the preamble to the CUSO rule when NCUA adopted the provision on leasing
excess real estate indicates the proposed activity is not within the
rule's scope:

> This covers real estate leasing only of premises acquired for CUSO
> business, and otherwise mainly used in CUSO business, that may later
> be used for future CUSO expansion. CUSOs are still otherwise obligated
> to demonstrate that the purchase of any real property will be used for
> CUSO purposes. NCUA expects that any real property purchased by a CUSO
> for future expansion should have a future benefit to the CUSO as
> evidenced by a business plan discussing future use of the real
> property.

63 Fed. Reg. 10743, 10751 (March 9, 1998).

As an alternative to the FCU's proposal, we note NCUA's regulations
specifically permit an FCU to provide employee benefits. 12 C.F.R.
§701.19. To address the problem of affordable housing close to FCU
offices for employees, we suggest the FCU consider providing an employee
benefit such housing stipends or special loan rates to qualifying FCU
employees. If you have further questions about these or other options,
please feel free to contact me or Staff Attorney Regina Metz at
703-518-6540.

> Sincerely,

Sheila A. Albin

Associate General Counsel

GC/RMM/SAA:bhs

06-0545

cc: Region III