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4000 - Advisory Opinions
Part 362: Equity Investment in a Limited Liability Company Whose
Purpose Is Acquiring Low Income Housing Tax Credits
FDIC--94--52
October 13, 1994
Sandra Comenetz, Counsel
This responds to your letter to the FDIC in which you inquire
whether an equity investment by a state bank in a State limited
liability company (LLC) for the purpose of acquiring low income housing
tax credits would be considered an equity investment as a limited
partner in a partnership under sections
12 U.S.C. § 1831a(c)(3) of
the FDI Act and 12 CFR
§ 362.3(b)(2); and, if not, whether a state bank could invest
in a Utah LLC to the same extent authorized for a national bank. We
apologize for the delay in replying.
The starting point for determining whether an equity investment is
permissible for an insured state bank is section 24 of the Federal
Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1831a, which
provides that an insured state bank may not, directly or indirectly,
acquire or retain an equity investment of a type, or in an amount, not
permissible for a national bank. 12 U.S.C. § 1831a(c)(1) and
(f)(1)M. 1
{{2-28-95 p.4907}}
There is an exemption, however, for equity investments in qualified
housing projects ("QHPs").
Notwithstanding any other provision of this subsection, an
insured State bank may invest as a limited partner in a
partnership, the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation, or new construction of a
qualified housing project.
12 U.S.C. § 1831a(c)(3)(A) (emphasis
added). 2
While it appears that members of LLCs have greater protection from
personal liability than limited partners in a limited partnership, the
exemption in Section 24 applies solely to limited partnership
investments in QHPS. The legislative history to 12 U.S.C. § 1831a
sheds no light on Congress's reasons for requiring that an insured
state bank invest in QHPs as a limited partner in order to qualify for
the exemption. Nor have we found any indication in the legislative
history that the section should be read broadly. Moreover, the
exemption applies only to the "acquisition, rehabilitation, or new
construction" of QHPs, not to the acquisition of tax credits. To the
best of our knowledge, equity investment by national banks in LLCs are
not among the investments that the OCC has approved across the
board for national banks. In keeping with the basic tenet of
statutory construction that exceptions are to be narrowly construed, we
are reluctant to read the QHP exception broadly, and conclude that an
insured state bank may not rely on the exception in 12 U.S.C.
§ 1831a(c)(3)(A) and make equity investments as a member/owner in an
LLC, instead of as a limited partner.
Nevertheless, there may be other ways to approach the issue. We
understand that at least one equity investment in a State LLC met the
OCC's requirements for a community development investment under 12
U.S.C. § 24 (Eighth) and (Eleventh) and Interpretive Ruling 7.7480
(replaced by 12 CFR Part 24). Thus, if the OCC found that the bank's
proposed investment, were it made by a national bank, qualified under
12 U.S.C. § 24 (Eleventh) and 12 CFR Part 24 as a community
development investment, the investment would fall outside the scope of
Section 24 and Part 362.
For your information, we have enclosed a copy of an FDIC advisory
memorandum that, among other things, sets forth the circumstances under
which an investment made for public welfare purposes could be
permissible for a state bank. If the investment is on the list of
previously approved investments maintained by the OCC, or if the state
bank (assuming it were a national bank) could take advantage of the
OCC's self-certification mechanism, and, in both cases, certain other
criteria are met, the investment would be permissible. If the foregoing
are inapplicable, the state bank could request the FDIC's consent to
hold the investment indirectly through a majority owned subsidiary
provided that the bank meets its minimum capital requirements. If none
of the foregoing are applicable, and because the FDIC defers to the
OCC's determinations in such matters, the state bank could request that
the FDIC seek the OCC's opinion whether the activity is permissible for
a national bank. If the OCC were to determine that the investment meets
its criteria for a national bank, the FDIC would accept that
determination.
Thank you for writing to the FDIC.
{{2-28-95 p.4908}}
1"Equity investment" means, inter alia,
any partnership interest; any equity interest in
real estate as defined in
§ 362.2(e); and any
transaction which in substance [meets § 363.2(f) criteria] even
though it may be structured as some other form of business transaction.
12 CFR § 362.2(f). With certain exceptions
not relevant here, "equity interest in real estate'' means
any form of direct or indirect ownership of any
interest in real property, whether in the form of an equity interest,
partnership, joint venture or other form, which is accounted for as an
investment in real estate or real estate joint venture under generally
accepted accounting principles. . . .
12 CFR § 362.2(e). Go Back to Text
2A QHP is
residential real estate intended to primarily
benefit lower income persons throughout the period of the bank's
investment including but not necessarily limited to any project
eligible for the low income housing tax credit under section 42 of the
Internal Revenue Code (26 U.S.C. 42).
12 U.S.C.
§ 1831a(c)(3)(C)(i), 12
CFR § 362.3(b)(2)(i). Go Back to Text
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