# O

+-----------------------------------------------------------------------+
| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
+-----------------------------------------------------------------------+

Washington, DC 20219

###### Interpretive Letter #1048

December 21, 2005 **January 2006**

###### 12 USC 29

Re: Request for Legal Opinion from **\[ \], \[ City, State \]**, on
Funding Proposal

Dear **\[ \]**:

This letter responds to your request on behalf of **\[ \], \[ City,
State \]** ("Bank"), concerning the Bank's proposal to provide funding
to a limited liability company ("Company") that would operate a wind
energy project[^1] ("Project"). The Project uses wind turbines to
generate electricity and sells the electricity through long-term
contracts. The sale of the electricity generates renewable electricity
production tax credits under section 45 of the Internal Revenue Code, 26
U.S.C. § 45 ("Section 45 Tax Credits"). In order to reduce the cost of
financing to the Company while ensuring a proper return on the
financing, the Bank proposes a structure that will allow it to take
advantage of the Section 45 Tax Credits. For the reasons discussed
below, we conclude that the Bank may provide financing to the Company in
the manner described, provided the Bank's examiner-in-charge ("EIC") is
satisfied that the Bank has adequate risk management and measurement
systems and controls to conduct the financing activity in a safe and
sound manner.

#### I. Proposal

The Bank desires to provide financing to the Company. At the request of
its customer and in order to provide the financing in a manner that
maximizes the use of the available tax credits, the Bank would acquire
approximately 70% of the equity interest in the Company. The remaining
interest would be acquired by the Project's sponsors and managing
members of the Company, *i.e.*, the Bank's customer.[^2]

The Company would acquire the necessary manufactured wind turbines and
all ancillary equipment for the Project and would acquire an interest
(either a leasehold interest or an easement) in the underlying real
estate. Management and operation of the Company would be the
responsibility of the Project's sponsors and managing members, with
day-to-day operations handled through an operations and maintenance
contract with an experienced third-party. Energy output would be
contractually sold on a long-term basis to creditworthy parties.

You represent that the Bank's decision to extend financing to the
Company would be based upon a full credit review of the transaction.
This review and creditworthiness determination would be made pursuant to
the Bank's standard loan underwriting criteria, including the assessment
of a variety of project sensitivities based on various risk scenarios to
ensure a predictable rate of return. If the financing for the Company is
approved, the Bank would provide financing in the form of an investment
in the Company. The Bank would be repaid in regular installments
consisting of income provided by the revenues produced by the Project
and the Section 45 Tax Credits.

In order to avoid recapture of the Section 45 Tax Credits, the Bank must
hold its interest in the Company for at least ten years. Promptly after
the expiration of the statutory holding period, the Bank would sell its
interest in the Company to the Project's sponsors and managing members.

Finally, you represent that the Bank would have a variety of remedies
available if a Project proved to be performing poorly. The Bank would
have available to it covenants similar to those found in a secured
financing transaction, including the ability to force a vote for
dissolution of the LLC. If the Bank wished to extricate itself from a
distressed Project, it could do so by selling its interest in a manner
similar to that employed in selling distressed loans. With respect to a
distressed Project, if caused by the Project manager, in addition to
removing the manager the Bank would have a variety of claims available
against the manager, its assets, and its cash flows. Where the distress
is beyond the manager's control, the bank believes the distressed
Project would be comparable to a project finance transaction in which
the lenders collectively decide to liquidate the asset or individually
to sell their loans in the marketplace. In either instance, a key
component of the realized value would be based on the circumstances of
the underlying assets.

#### II. Legal Analysis

***A. Funding the Company is a permissible exercise of lending
authority.***

A national bank may engage in activities that are part of, or incidental
to, the business of banking. Twelve U.S.C. § 24(Seventh) provides
national banks with broad authority to make loans or other extensions
credit.

The transaction proposed by the Bank is a form of structured financing
patterned after a typical debt transaction -- the extension of credit to
the Company with payment to originate from proceeds received from the
sale of power generated by the project. The Bank represents that the
decision whether to provide financing to the Company would be based upon
a full credit review of the transaction made pursuant to the Bank's
standard loan underwriting criteria. The Bank further represents that
the Company's LLC agreement would contain many of the same terms,
conditions, and covenants typically found in lending and lease financing
transactions, including representation and warranties, conditions
precedent to funding pertaining to the mitigation of risks, covenants
requiring the Company and the other investors to provide the Bank with
customary financial information, and covenants restricting the Company
from taking certain actions.

In Corporate Decision 99-07 (May 26, 1999), we approved a national
bank's provision of financing to an entity that owned and wished to
rehabilitate several historic properties. The bank provided the
financing in the form of an investment in the entity, which permitted
the bank to receive the federal rehabilitation tax credits. We concluded
that, in substance, the transaction was the provision of construction
financing which would be repaid both from the rehabilitated properties'
operating income and through the tax credits. By taking advantage of the
tax credits, the bank was able to facilitate the financing by reducing
the cost of borrowing while receiving an appropriate yield. For these
reasons, it was proper to treat the transaction as an extension of
credit that is permissible for national banks.

Similarly, in an Interpretive Letter, dated November 4, 1994 (available
in Lexis-Nexis), we approved a national bank's provision of financing to
owners of natural gas leases by acquiring an interest in a business
trust that owned the working interests in the leases. By structuring the
financing as an investment in the trust, the bank qualified to receive
the federal tax credits, thereby permitting the bank to reduce the cost
of the financing while assuring an appropriate return. The letter
concluded that the transaction was the equivalent of an extension of
credit and that the substance of the transaction should prevail over the
form in which it had been cast.[^3]

Based upon the information provided and the Bank's representations, the
proposed financing transaction fits the definition of loan or other
extension of credit in section 24(Seventh).

#####  B. Transaction is not prohibited by 12 U.S.C. § 29

The structure of the proposed financing transaction -- as an acquisition
by the Bank of an interest in the Company -- is customer-driven,
requested by the Project's sponsors and managing members as an efficient
and cost-effective means to provide financing for the Project.
Notwithstanding this structure, the substance of the proposed
transaction remains, as described above, the provision of financing for
the Project.

The economic substance of a transaction, rather than its form, guides
our analysis of whether a national bank is prohibited from engaging in a
certain activity.[^4] Here, the investment in the Company is a means to
provide financing to the Project. As part of the proposed financing
arrangement the Bank, through its acquisition of an interest in the
Company, will acquire interests in the land and the wind turbines.
Because the substance of the transaction guides our analysis, we look
through the form of the proposed transaction and assess whether the
indirect interests in the land and the wind turbines acquired by the
Bank (through its investment in the Company) are interests in real
estate subject to 12 U.S.C. § 29 ("section 29") and, if so, whether the
Bank permissibly may acquire such interests as an integral part of the
proposed transaction.

A national bank's authority to own real estate is governed by section
29, which provides that "\[a\] national banking association may
purchase, hold, and convey real estate for the following purposes, and
for no others:

First. Such as shall be necessary for its accommodation in the
transaction of its business.

> Second. Such as shall be mortgaged to it in good faith by way of
> security for debts previously contracted.

Third. Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings.

> Fourth. Such as it shall purchase at sales under judgments, decrees,
> or mortgages held by the association, or shall purchase to secure
> debts due to it."

Thus, section 29 grants national banks the authority to purchase, hold,
and convey real estate only for certain specified purposes. Unless
authorized by another statute, national banks may not acquire, own, or
convey an interest in real estate for any purpose other than those
specified in section 29.[^5]

The critical determination is whether a certain property interest
constitutes a section 29 interest in "real estate." Section 29 itself
does not contain a definition of "real estate" and does not direct the
OCC to consider state law definitions in applying the statute.
Nonetheless, as a general matter, the OCC has in the past been guided by
state law in determining whether particular interests are subject to
section 29.[^6] More specifically, the OCC previously has looked to
state law definitions of "real property," a term with a broader meaning
than the language -- "real estate" -- used in section 29.[^7]

In recent years, however, it has become increasingly apparent that
market developments have created, and national banks' financial
intermediation activities may involve, types of assets clearly
distinguishable from the type of asset typically associated with the
term "real estate," yet which come within state law definitions of "real
property." Moreover state law definitions are not consistent and an
asset may be within the definition of "real property" in one state, but
not another. Using a different definition of "real estate" for purposes
of section 29 in different states thus could result in national banks'
permissibly acquiring certain interests in one state but being
prohibited by section 29 from acquiring the same interest in another
state. Such a result is illogical, inefficient, and is inconsistent with
the authority of national banks to operate under uniform federal
standards.

Accordingly, we have determined that in the future we will apply a
federal definition of "real estate" to determine what constitutes real
estate subject to the limitations of section 29.[^8] In determining
whether a property interest is subject to section 29, this federal
definition will be guided by the purposes and principles underlying
section 29. For example, soon after enactment of the Act, the Supreme
Court in *Union National Bank v. Matthews*,[^9] stated that the three
purposes underlying section 29 were to keep the capital of the banks
flowing in the daily channels of commerce; to deter national banks from
embarking in hazardous real estate speculations; and to prevent the
accumulation of large masses of such property in the banks' hands, to be
held, as it were, in mortmain.[^10] We also will consider the treatment
accorded such interest under the laws of the various states, but the
state law characterization of the interest will not, alone, be
dispositive.

In this proposal the Bank would acquire, through its investment in the
Company, an indirect interest in the land upon which the wind turbines
would be affixed. This interest, whether a leasehold interest or an
easement, clearly is an interest in real estate subject to section
29.[^11] We further conclude that the Bank's acquisition of this
interest is not prohibited by section 29.

Notwithstanding section 29, national banks may acquire an interest in
real estate when doing so is an integral part of an authorized banking
activity, provided that doing so is not inconsistent with any of the
purposes underlying the limitations of section 29. This principle is
well supported by OCC precedent. In Corporate Decision No. 98-17,
*supra*, the OCC permitted a national bank to acquire working interests
in natural gas leases in order to provide financing to the producer. In
order to allow the bank to take advantage of available tax credits to
reduce the cost of borrowing to the producer while ensuring the bank's
return on its extension of credit, the bank acquired the working
interests in the gas leases. The letter opined that because acquiring
legal title was an integral step -- undertaken to further the
permissible financing transaction -- acquisition of the working
interests was not prohibited by section 29.[^12]

Similarly, in Corporate Decision No. 99-07, *supra*, we approved the
provision of financing to an entity that owned and wished to
rehabilitate several historic properties. The bank provided the
financing by acquiring an interest in the entity, thereby giving the
bank an interest in the historic properties. Such an interest permitted
the bank to receive the federal tax credits. The decision concluded the
bank's acquisition of an interest in real estate was not prohibited by
section 29 because such acquisition was an integral part of authorized
financing activity.

A key element to each of these letters is that the interest in real
estate must be acquired as an integral part of an authorized banking
activity. In the case of the proposal here, the Bank would acquire its
indirect interest in real estate as part of and in furtherance of its
provision of financing for the project. By taking advantage of the tax
credits, the Bank would be able to facilitate this financing by reducing
the cost of borrowing while receiving an appropriate yield.

Further, the acquisition of these indirect interests in real estate is
not inconsistent with any of the purposes underlying the limitations in
section 29.[^13] The Bank's capital, far from being removed from the
daily channels of commerce, would be put to productive use by the
Company to finance the Project and would be repaid to the Bank in
regular intervals. The Bank would not acquire large amounts of real
estate to be held indefinitely; rather, the Bank's interests would be
restricted both in scope and time. Under the LLC agreement, the Bank
would have no responsibility or obligation to manage or operate the
Project. Such responsibilities would be the obligation of the other
members of the Company. And the Bank's interests would be held only for
the statutory holding period required by the Internal Revenue Code.
Promptly upon the expiration of this holding period, the Bank would sell
its interest in the Company to the other members.

Finally, the acquisition of the interests in real estate is not
speculative. Structuring the financing in the manner proposed is
necessary for the Bank to remain competitive in the marketplace for
financing renewable energy producing projects. The structure of the
proposed financing is driven by the Project's sponsors, and if the Bank
cannot provide the financing in the manner proposed, the borrower would
look elsewhere. Moreover, the Bank would not share in the appreciation
or depreciation in value of the land or turbines. When the Bank divests
its interest in the Company at the end of the statutory holding period,
it would sell its interest to the Company's other members. These members
would continue to own and operate the project and, upon termination of
the project, would recognize any change in value of the land and
turbines.

#### III. Conclusion

For the reasons provided above, and provided the Bank's EIC is satisfied
that the Bank has adequate risk management and measurement systems and
controls to conduct the financing activity in a safe and sound manner,
we conclude that the Bank may provide financing to the Company in the
manner stated. Our conclusion is based upon the information and
representations you have provided. A material change in the facts may
result in a different conclusion. If you have any questions, please
contact Steven Key, Senior Attorney, Bank Activities & Structure
Division, at (202) 874-5300.

Sincerely,

#### /s/ Julie L. Williams

Julie L. Williams

First Senior Deputy Comptroller

and Chief Counsel

[^1]: A "wind energy project" consists of an expanse of land covered
    with wind turbines that harness wind energy.

[^2]: The Project's sponsors typically are entities experienced in the
    energy industry with a history of such sponsorship.

[^3]: *See also* Corporate Decision 98-17 (March 23, 1998) (approving as
    an extension of credit transaction that included bank's acquisition
    of working interests in natural gas leases operated by borrower).

[^4]: *E.g.,* Corporate Decision 99-07, *supra;* Corporate Decision
    98-17, *supra*; Interpretive Letter, dated November 4, 1994,
    *supra*. *See also* Interpretive Letter No. 867, *reprinted in*
    \[1999-2000 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-361
    (June 1, 1999) (noting that OCC looks to substance of
    non-traditional financing arrangement to determine whether it is
    permissible part of business of banking).

[^5]: National banks may acquire a section 29 interest in real estate
    when doing so is an integral part of or incidental to an authorized
    banking activity, provided that doing so is not inconsistent with
    any of the purposes underlying the limitations of section 29. *See,
    e.g.,* Corporate Decision No. 99-07, *supra* (acquisition of
    interest in historic property permissible as integral to provision
    of construction financing); Interpretive Letter No. 966 (May 12,
    2003) (acquisition of legal title to residential real estate for a
    period not to exceed ninety days, where bank divests itself of
    beneficial interests in real estate, permissible as incidental to
    package of finder and other bank permissible activities).

[^6]: As far back as 1982, the OCC acknowledged that reference to state
    law to determine the definition of "real estate" was not required by
    section 29. *See* Interpretive Letter (March 18, 1982) (published in
    Lexis-Nexis).

[^7]: Cunningham et al., *The Law of Property* § 14 (1984 ed.); Tiffany,
    *The Law of Real Property* § 1 (1970 ed.).

[^8]: This approach is consistent with the approach that the OCC has
    taken in defining other terms that appear in the National Bank Act
    ("Act"). The Act is a vehicle for the implementation of federal
    policy with regard to banking. Accordingly, the OCC generally has
    developed federal definitions for the crucial terms that appear in
    the Act. For example, the OCC has developed and continues to apply
    federal definitions of "interest" for purposes of 12 U.S.C. § 85 and
    "branch" for purposes of 12 U.S.C. § 36. There is nothing in the
    plain language or legislative history of section 29 that demands a
    different approach.

[^9]: 98 U.S. 621 (1878).

[^10]: *Id*. at 626.

[^11]: Through its investment in the Company, the Bank also would
    acquire an interest in the wind turbines. The states that have
    considered the character of wind turbines are split as to whether
    they are real property or personal property. For example, New York
    has characterized wind turbines as taxable real property, *see* 9
    Op. Counsel S.B.R.P.S. No. 114 (Jan 27, 1993), while the Colorado,
    South Dakota, West Virginia, and Wyoming legislatures have
    characterized wind turbines as personal property, *see* Colo. Rev.
    Stat. § 25-6.5-201; S.D. Codified Laws Ann. § 10-4-36; W.Va. Code
    Ann. § 11-6A-5a; Wyo. Stat. Ann. §§ 39-15-105 and 39-16-105. In
    California, the courts have determined that wind turbines are
    personal property. *See In re Oak Creek Energy Farms, LTD*, 107 B.R.
    266 (Bankr. E.D.Cal. 1989), *aff'd* 119 B.R. 739 (E.D.Cal. 1990),
    *aff'd* 956 F.2d 1167 (9^th^ Cir.1992). However, because we conclude
    for the reasons below that section 29 does not preclude the Bank
    from holding interests in real estate as an integral part of this
    transaction, we need not decide the issue of whether the interests
    in the turbines are "real estate" under our federal definition of
    the term.

[^12]: *See also* Interpretive Letter, dated November 4, 1994, *supra*
    (acquisition of working interests in natural gas leases operated by
    borrower an integral part of provision of financing). We express no
    opinion whether working interests in natural gas leases are
    interests in "real estate" under the federal definition adopted in
    this letter.

[^13]: *See* footnotes 9 and 10, *supra.*