Branches Are Changing. Could the Ownership Model Change Too?

In this sponsored episode of the ProSight Banking Strategies Podcast, Brookline founder Bill Yeomans explores how sale-leaseback strategies are helping banks unlock capital, modernize branch networks, invest in technology, and rethink real estate ownership while maintaining strong community presence and growth.

Subscribe to ProSight Podcasts: Apple, Spotify, Amazon Music, YouTube

For more on this topic, don’t miss the ProSight Quick Q&A with Bill Yeomans, founder and president of Brookline Branch Services.

TRANSCRIPT:

Frank Devlin: This is the ProSight Banking Strategies Podcast. We’re here to inform you on the top trends, challenges, and opportunities in banking today. ProSight is a leading non-lobbying connector of people and information with deep expertise in risk, fraud, compliance, and retail and commercial banking. Our purpose is to empower financial services leaders to strengthen and advance our industry through training and insights, as well as tools and resources like this podcast.

For decades, banks and credit unions viewed their branch networks not only as service hubs, but also as real estate assets that sat on their balance sheets. But as institutions rethink branch formats, invest in digital capabilities, and look for new ways to deploy capital, a financing strategy long used in industries like retail, healthcare, and hospitality is starting to gain traction in financial services as well—the sale-leaseback.

Under a sale-leaseback arrangement, a financial institution sells a property that it owns and immediately leases it back, freeing up capital while continuing to operate from the same location. While the concept is far from new, a growing number of banks and credit unions are taking a fresh look at whether branch real estate should be viewed as a core asset or as capital that could be put to work elsewhere.

Today, we’re exploring the evolution of sale-leasebacks, why they became popular in other industries before they gained attention in banking, and what’s driving renewed interest in this strategy. We’ll discuss the potential benefits and challenges, how these transactions affect branch operations, and how institutions are deploying the capital they generate. We’ll also examine what this trend could mean for the future of bank branch ownership and whether there’s still significant opportunity ahead.

Joining us to share those insights is Bill Yeomans, founder and president of Brookline. Thank you for being here, Bill.

Bill Yeomans: Thank you very much, Frank. I look forward to the conversation.

Devlin: As do I. Such an interesting topic. I was hoping that, for people who aren’t so familiar with it, we can start with the basics. Can you just describe what a sale-leaseback is and how it works exactly?

Yeomans: Okay, sure. So a sale-leaseback is a real estate transaction where an owner of a retail, or in our case financial institution, decides to monetize their real estate by selling it to a third party and then retaining the right to operate under a lease. So it’s been commonly used by retail outlets for years as a way of, number one, financing the transaction because they don’t have to put up as much upfront money to build the store or build the bank branch. And number two, it allows them to expand. So very simplistically, if it costs a retail outlet $20 million to build a brand-new store and they have a budget of $20 million, they can build one store a year. However, if they’re willing to lease to a third-party developer at $2 million a year, they can now expand to 10 stores versus one store.

Most retailers have utilized this model to allow them to expand and conserve capital. So for example, Walgreens and CVS both operate roughly 8,000 to 9,000 stores nationwide, yet they only own roughly 3% of all those stores because they will tell you they’re not in the real estate business, they’re in the drugstore business and they need to concentrate their time, effort, energy, capital, and resources to be the best drugstore they can be. And they view real estate, while essential, as not part of their core business. So hence they decide to invest in their core business, whether it’s AI or whether it’s cybersecurity or whether it’s expanding versus tying up capital in real estate.

Devlin: So interesting that you’ve put it that way and it’s a good way to put it. So they kind of leverage the money that they would’ve put into real estate and they’re able to do a lot more and open a lot more sites. It’s hard to imagine they’d be able to run that many sites if they did have to own every property. I’m not sure it would even be possible, but very interesting way to look at it. Is there anything different about a sale-leaseback for a bank or credit union versus say a Walgreens? And I think I learned this from you in an earlier conversation, even medical facilities, it became the thing to do where a medical chain might decide to do a sale and a leaseback. What’s different about a bank or credit union that folks have to be aware of if they want to go that route?

Yeomans: Historically, banks and credit unions were a little bit reluctant to enter into sale-leasebacks for probably two reasons. Number one, they had security concerns because obviously the bank or the credit union was very important. They had cash, they had accounts, they had customer information, so they were very protective of that. And then number two, they had a lower cost of capital. So, they had the ability to build it at a lower cost because they’re basically using their funds versus borrowing funds like a third-party developer would do. But that’s changed because number one, the security concerns are not somebody physically robbing the bank anymore or the credit union. The security concerns now revolve around AI or cybersecurity or fraud and so on, which are not really part of the physical branch network.

In addition to that, banks are now having major capital concerns about how they allocate their available capital because they have a lot of stress to invest wisely in AI, to invest in cybersecurity, to invest in marketing, to invest in personnel. So now it becomes a decision they need to make—where do they want to allocate their capital? So, they’re now forced to review their branch network and prioritize where they need to spend their investment dollars in capital.

Devlin: Could part of the reason that banks might have been a little bit reticent and maybe some may continue to be reticent about the sale-leaseback is they may have to enter a long-term lease on that branch, whereas say if they owned it, they could decide in six months or a year we actually do want to shutter this branch, but if we enter into a long-term lease, then we’re stuck with that property. Does that play into this calculus at all?

Yeomans: It does a little bit. However, an argument could be made that they’re actually better off under a lease because under a lease they have one agreement. It’s a lease agreement which outlines their rights and obligations under the lease and it has a term. So if they decide to close the branch before the end of the term of the lease, their only financial liability is the lease payments remaining when they close that branch. However, if they own a branch and decide to close it, now they have a building that they have to refurbish, they have to continue to pay taxes, continue to pay insurance. They have to find out who could they sell it to and who’s going to buy it and at what price because whoever buys it is going to have to retrofit the building to find a new use for it.

So an argument could be made that leasing versus owning gives the bank many more options and their financial liabilities are limited and to only the lease agreement. So for example, if a bank decides to sell a branch, the buyer will have to get under the hood, check out environmental, check out the engineering, the structure, the property reports and so on. Whereas if they’re leasing, basically you only have one document and that’s the lease agreement.

Devlin: One of the big reasons that banks like to do this is that we are in a modern era now. You mentioned how branches, it’s less about the vault and the people in there. So the branches are now used for more higher value conversations, that sort of thing. People are doing so much banking online, so the footprint of branches is shrinking dramatically, so they’re much smaller. So what happened is a bank will lease back a much smaller portion of that building and other tenants will come in. When you’re thinking about it in that way, so if a bank is planning to renovate a branch anyway and they’re thinking, you know what, maybe we’re going to half our square footage here, is that a good time to think about, well, maybe this is the time to sell it and do a leaseback because we’re going through all this work anyway. Is that what prompts some of these deals?

Yeomans: Yes. A number of banks that we’ve worked with have had a number of what we call large oversized branches, maybe 10, 12, 15,000 square feet, where the average bank branch size now is anywhere from 2,500 to 5,000 square feet. So they have this excess space. So with those situations, we’ve entered into what is called a sale partial leaseback. So we buy the branch from the bank and they lease back only a smaller portion. So given my earlier example, if a bank has, we’ll say 10,000 square feet on two floors, we would buy the branch and the bank then would lease back only the first floor. And so now they’ve reduced their footprint to something that’s far more manageable and they can modernize that branch.

And they also save in the sense that their alternative is to close that branch and build another branch. And if they want to maintain a presence in the market, they may like that location, they may have good deposits at that location. So it makes it much easier for them to save money, create capital. And the other benefit, doing a sale partial leaseback, they open the door to third-party tenants coming into the building as we lease out the second and/or third floors. So in every case we’ve done a sale partial leaseback, deposits at the bank have increased, which shouldn’t be too surprising because now you have more traffic coming to the location.

We have one example in West Bend, Wisconsin where we basically shrunk the bank to probably 40% of its original size, and then we backfilled the then-vacated space with United Way, YMCA, and a commercial tenant. Not only did their deposits go up, but the business activity increased dramatically because of all the foot traffic that now came to this location. And there also were some great synergies, especially with United Way and YMCA, joint promotions were held in the bank lobby and it also assisted them with their CRA commitment. So, all in all, it was a win-win-win situation for the bank and the community and the third-party tenants.

Devlin: Any banking, whether it’s a community bank or even a big bank that has branches, community involvement is so important and I can’t think of a better example of having that kind of entree into the goings on and the people in the community and how to help them, than having those organizations be your co-tenants. That’s definitely a big win there. What are some of the reasons you think there’s been a significant pickup in the number of sale-leaseback deals in the last few years? If you look at just the raw numbers and the value of these propositions for the last few years.

Yeomans: I think banks and credit unions are both under a lot of pressure to have available capital, whether it’s regulatory pressure, whether it’s because they have underwater securities portfolio that they’re concerned about. I mean, near the end of COVID, a lot of banks and credit unions invested in bonds and a lot of those bond portfolios are underwater because of rising interest rates. They’re trying to deal with that. There’s also the need to make key decisions on how they want to use their capital and where do they want to place their priorities as a bank.

Branch real estate is real estate. It’s a necessary component to the growth of the bank and presents itself as a billboard, as a place to come for advice, make deposits and so on. However, they’re keenly aware that they need to continually invest in AI, mobile banking and all these other components. So, it’s more shifting their priorities to a higher and better use of their capital.

Devlin: I think I’ve read somewhere, and please correct me if I’m wrong, that it may be a generational situation as well where in the past the solidity of that big bank branch was important. The solidity of a bank owning its own real estate was somehow important as to how strong or dependable the bank was. Whereas maybe a new generation is coming in and they’re seeing things, as you’re saying, they’re not in the business of real estate. There’s no reason for them to own the real estate. Are you noticing maybe of the next generation coming up feeling less tied to that real estate? Do you think that’s playing into this at all?

Yeomans: Yeah, I think a little bit. When you walk into a bank, you don’t know who owns that branch. You don’t know if it’s owned by the bank or a third party. And so it used to be years ago when there were like 13,000 banks, now there’s only 4,500 banks in the United States and there’s roughly 4,500 credit unions. So the number has shrunk even though it still remains relatively large. So it used to be this is our bank, this is our… And my grandfather built this branch and so on. So there was that strong identity to the real estate, but a lot of that has changed for a variety of reasons.

I mean, there was an article published just yesterday that the net additions for the last three quarters, there have been more branches opened than branches closed. We’re starting to see, believe or not, an expansion in bank branches. Now these branches are going to be different and they’ll be small, almost like an Apple store, if you will. There’ll be more advisory in nature, but there still seems to be a very strong feeling among consumers that they want that branch. And there have been a number of studies, which is very interesting because if you go back 5, 10 years ago, most people thought bank branches were going to be obsolete because of mobile banking and the internet.

But now all that’s changed and we’re seeing an increase in bank branches. Now part of that also has to do with population migration. So, you’re going to see that in the Southeast and Southwest, there’s been a dramatic increase in number of branches to meet the changing migration that’s happening from the Northeast, Midwest to the South, Southeast and Southwest.

Devlin: In ProSight conversations with community bankers, we’ve heard some interesting things, and one is that they really so much want to get to the younger generations and that they’re less prone to want to use a branch. But then when they do come in and use a branch, they do like it. They find that in certain cases they do want to talk to a person. They don’t want to just have a phone call or be online, which is interesting. And then I’ve come across some research that says that, say people don’t want to use branches often, they still like to see that their bank has a branch in their town. They might just drive by it, but there’s something psychological. It’s causing branches to remain as important parts of the banking experience.

Yeomans: Right. Yeah. There was a recent JD Power report that said 72% of customers use their local branch at the same frequency as before, but 38% call the branch indispensable. The branch is the billboard. Now again, I think branches are not only changing internally of how they look, but they’re also looking at co-tenancy as another way to draw tenants, not just with co-tenancy within the building, but there can be situations where there’s a coffee shop or a Verizon store next to a bank branch, not within the branch, but next to it such that there again is more foot traffic being generated to the location.

Devlin: So, considering all these ways that you can get that billboard effect and that feeling of solidity and connection with your customers without actually owning that property, are banks just more likely when they say if you’re starting from scratch, are they likely just to lease from the very beginning now? Is anyone starting building branches or all these examples that you’re giving of now we’ve seen the turnaround where we hit the equilibrium whereas many bank branches were now being opened as much as closed, so reversing that trend and now more branches being built? Are they mostly leased or are they mostly constructed?

Yeomans: Clearly there’s a paradigm shift going on where banks are moving more towards leasing than owning, but it still has a long way to go. Believe it or not, we’re working with a bank right now that operates 191 branches and they own 189 of the 191. And we haven’t reviewed every bank or every credit union in the United States obviously because of the large numbers, but we’ve probably reviewed anywhere from 300 to 400 different banks and credit unions. And what we find on average is these institutions own anywhere from 50 to 60% of their branches. So, if you’re looking at roughly $3 million per branch as a valuation, there’s a lot of embedded capital that’s sitting out there that banks and credit unions can generate.

Devlin: So, it’s interesting that you provided that average value of the branch. I guess it depends, some of these decisions depend on the local real estate market. There’s probably a lot of variables depending on what the management thinks about that. Does that affect these decisions?

Yeomans: When you look at doing a sale-leaseback, you look at really three things from an acquirer point of view, meaning if we’re looking to do a sale-leaseback with a bank, we’re looking at number one, the bank’s credit and the bank’s business plan and what does this bank want to do? How do they want to grow? What’s their credit rating? What’s their market share and so on? Number one is looking at the bank credit. Number two is looking at the real estate. Is this good real estate? Is it well located? Does it have other uses potentially? And then finally, number three is the lease economics. Do the numbers work? Is the bank willing to sign a long-term lease? What’s their commitment to the location? So, basically these are the three factors we look at when engaging with a bank on a sale-leaseback.

Devlin: This has been a really great, interesting conversation. Not only did you explain the very interesting mechanics of a sale-leaseback, but we got into history of branches and history of sale-leasebacks in other industries. Really great stuff. I had one more question if that’s okay. And that was considering where we are right now in the economic landscape and the financial industry landscape, it seems like there’s still quite a bit of room to run for the concept of sale-leasebacks. Do you agree with this? Where do you see the whole idea and the industry going?

Yeomans: First of all, I think there is a lot of room to run. I started the conversation talking about CVS and Walgreens and how they only own roughly 3% of all their stores. And you look at banks and credit unions owning roughly 50 to 60%. Given the intense pressure there is on banks and credit unions to raise capital for what I call more bank-centric needs, whether again, AI, cybersecurity, mobile banking, I think you’re going to see a continued evolution and paradigm shift from ownership to leasing. So I think there is a lot more activity. Banks and credit unions are not the fastest decision makers. They’re not like other retailers such as grocery stores, drug stores, et cetera. But we’re sensing a clear paradigm shift and a movement towards leasing.

Devlin: Great. Well, thanks so much for sharing your perspectives with our audience today, Bill, and thanks for joining us on the ProSight Banking Strategies Podcast. To our listeners, thanks for spending your valuable time with us. If you liked it, please spread the word. I’m Frank Devlin, Senior Editor at ProSight Financial Association.

The views expressed by the speakers are the speakers’ own and do not reflect the views of ProSight Financial Association, BAI, or RMA. The views expressed and information shared are of a general nature and are not intended to address the circumstances of any particular individual or entity. No one should act upon any such views or information shared during this podcast without appropriate professional advice after a thorough examination of the particular situation.