Leasing of Excess Space by FCUs Should Be Subject to UBIT

Federal credit unions (FCUs) are leasing their excess space; but the income from such leasing arrangements is not subject to unrelated business income taxes (UBIT).

Recent examples of FCUs announcing plans to lease excess space include:

• Apple Federal Credit Union with $2.1 billion in assets is building a six-story, 150,000 square-foot headquarters building in Fairfax, Virginia. Apple FCU plans to occupy three floors and will lease the remaining office space.
• Pentagon Federal Credit Union has paid $164.1 million for a new 11-story, 307,634 square-foot headquarters building in Tysons, Virginia. The credit union plans to initially occupy about half of the office building. Pentagon FCU will lease about 150,000 square feet to LMI.

This trend should continue as the National Credit Union Administration yesterday finalized a rule eliminating the requirement that FCUs plan for, and eventually achieve, full occupancy of acquired premises. The final rule modifies the definition of “partially occupy” to mean occupation and use, on a full-time basis, of at least 50 percent of a premises by an FCU or by a combination of the FCU and a credit union service organization in which the FCU has a controlling interest.

This would allow an FCU to venture into real estate activities, which are outside the mission and purpose of an FCU's tax exemption.

Therefore, Congress should repeal Section 1768 of the Federal Credit Union Act. This would permit the income from unrelated activities such as the leasing of excess space be subject to UBIT.