When Buying a Bank – Why Real Estate Matters
When considering buying a bank, the selling bank’s loans, deposits, relationship with customers, vendor contracts, regulatory compliance, debt, and employee matters are all important assets and liabilities to be investigated. In addition, an important but often overlooked asset of a bank is its real estate, whether owned or leased. The following is a list of key due diligence items to review when acquiring a bank that has real estate that “tags along.”
1. Basic Due Diligence
First, a buyer should obtain a list from the selling bank of all real property (including OREO) relating to the selling bank and have the selling bank provide whether the real property is owned or leased. In addition, buyer should obtain from the selling bank:
a. A title commitment for an owner’s title insurance policy as to each owned parcel. This will confirm whether fee ownership is in the name of the selling bank or some other third party and will also provide a list of all recorded appurtenant rights and easements, covenants, and restrictions affecting the property.
b. Copies of all contracts, plans, surveys, environmental reports, and property condition reports for every parcel, whether leased or owned. This will help identify any initial issues or concerns relating to the real property.
c. Copies of leases for all leased properties whether the selling bank is the landlord or the tenant. As a condition to closing, the terms of such leases should be confirmed in an estoppel certificate. This will alert the buyer of any discrepancies the landlord and tenant may have as to the terms of the lease and uncover any defaults under the lease.
2. Leased Real Property
If the real property is leased, the buyer should consider the following:
a. Can the buyer assume the selling bank’s interest in the lease? Does the structure of the transaction require landlord’s consent, and if so, what is the timing and cost of obtaining landlord’s consent?
b. Are the remaining terms of the lease acceptable?
3. Owned Real Property
If the real estate is owned, the buyer should consider the following:
a. Does the selling bank have proper access to an existing drive-thru or standalone ATM facility?
b. Are all necessary improvements located within the boundaries of the property?
c. Where do customers park? Is the parking lot within the boundaries of the property, or does the selling bank have rights to park via other means? Is there sufficient on-street parking for customers?
d. Is there a driveway or other access into the parking lot, or the building? Is the access located on the property or on adjacent property? If access is via adjacent property, is there an easement in place providing for use?
e. Are there any easements that burden the property?
f. Are there any encroachments onto the property or from the property onto the neighboring property?
g. What about utility lines? Do they cross the property without the benefit of an easement?
To help answer the above questions, an ALTA survey for each owned parcel should be obtained. A copy of the title commitment will be required for the surveyor to prepare the survey. The survey will confirm access, confirm the existence of any encroachments, locate easements and utilities, and identify whether the documents listed in the title commitment affect the property. The foregoing are important because if there is not proper access or proper easements where needed, the bank may be forced to stop using its current access, parking lot, or other improvements. A survey can also provide insight as to whether there is room for expansion.
Does the use of the property as a bank (with a drive-thru, a standalone ATM facility, and/or a parking lot) comply with applicable governmental regulations, including the local zoning code?
In order to make this determination, a buyer should obtain a zoning report, which will provide whether the property complies with government regulations, including zoning, and what steps need to be taken to correct any issues. Failure to comply with local zoning requirements can force closure of the selling bank until the property complies.
5. Environmental Status
What is the environmental status of the property and of nearby property? Is there contamination either on the property or migrating onto the property from adjacent or nearby property that could impact use of the property?
To make this determination, a buyer should obtain a Phase I Environmental Assessment of each owned parcel to determine any risk of environmental contamination and the risk of state and/or federal cleanup enforcement. In certain cases, a Phase II Environmental Assessment or other testing may be required to further determine the risks. Failure to complete minimum environmental assessments on owned property may create unwanted environmental liability and potential for costly clean-up requirements.
6. Condition of Building
What is the condition of the building and other improvements on the property? Is there any mold or asbestos that may impact air quality and adversely affect employees or customers? Is the HVAC in good working order, and what is its remaining useful life? Does the roof need to be replaced? Is there any moisture intrusion?
To determine the condition of the property and potential short-term and long-term costs, a buyer should obtain a property condition report of each owned parcel, which will identify the repairs, replacements, and timing.
When buying a bank, real estate due diligence helps to avoid or mitigate costly real estate mistakes and expenses.