Magazine article American Banker

Small Banks Jump aboard REIT-Preferred Bandwagon

Magazine article American Banker

Small Banks Jump aboard REIT-Preferred Bandwagon

Article excerpt

When Flagstar Bank in Bloomfield Hills, Mich., wanted to build capital, it did not simply sell more stock to the public.

Instead, the $2 billion-asset bank created a real estate investment trust called Flagstar Capital Corp. and sold securities in the new company.

Under a 1996 Federal Reserve Board ruling, banks may create separate companies that invest solely in the bank's own real estate loans. As REITs, the new companies are exempt from paying most federal taxes. Moreover, proceeds from the sale of so-called REIT-preferred securities can be counted toward a bank's Tier 1 capital, which it can then use to finance growth.

"This is a cheap form of raising equity, and it doesn't dilute the value of our common stock," said Michael Carrie, chief financial officer at Flagstar. It is expected to complete its $50 million offering in mid- February.

REIT-preferred securities first came into vogue in late 1996 when the Fed approved Chase Manhattan Corp.'s application to create a bank-owned REIT. While larger banks and thrifts-including Maryland's Chevy Chase Bank and California Federal Bank in Los Angeles-quickly followed suit, community banks have only recently begun to take advantage of this financing tool.

Among them: Franklin Bank in Southfield, Mich., which completed its $20.7 million REIT-preferred offering in December; D&N Bank in Troy, Mich., which established a REIT in July; and Peoples Bank of California in Los Angeles, which issued REIT-preferred shares last October.

"You have to be willing to invest a lot of time and effort to understand how these things work," said David F. Simon, chairman of $502 million-asset Franklin. "We looked at it for a long time before we finally pulled the trigger."

REIT-preferred securities help banks in three ways. First, the assets of the company go straight to the bank's bottom line. Peoples Bank's assets, for example, have increased more than $50 million, to $2. …

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