A Wall Street Journal report last week brought news that federal regulators have cleared two national banks to develop office and hotel properties near their respective headquarters. As a result, both Charlotte, N.C-based Bank of America and Pittsburgh, Pa.-based PNC Financial are moving forward on $230 million in combined commercial projects.

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While the Treasury Department has historically barred banks from developing commercial properties, both Bank of America and PNC are exploiting a loophole that allows them to develop properties they plan to occupy. Bank of America claims that its employees will generate 50% of annual revenues at the $60 million Ritz-Carlton Hotel it will build near its corporate headquarters in Charlotte. PNC, in a similar fashion, plans to occupy roughly one-quarter of the office and hotel space that it is building in Pittsburgh.

The question is whether these two projects suggest that federal regulators will make it easier for banks to compete directly with developers. Regulators have traditionally limited banks from owning and developing commercial properties since a sudden decline in the real estate market could put bank capital at risk, especially if the bank acts as both the owner and developer of a project.

“If the bank plans to occupy much of the space on their own, that makes finding tenants that much less of a problem,” says Lawrence Fiedler, a real estate professor at New York University’s Real Estate Institute. Indeed, lining up tenants can be the most daunting part of the development business. Fiedler says that regulators obviously see it that way, or else they wouldn’t give owner-occupied bank projects their blessing. But he doubts that these two projects represent any dramatic shift in how the Office of the Comptroller of the Currency (a branch of the Treasury Department) views the intersection of banking and development.“The OCC is very cognizant of risk-based capital. And beyond that, I can’t really see why banks would want to go into the development business in the first place unless they meant to occupy much of the space,” he says.

Real estate attorney Russell Bershad is also puzzled at why any bank would want to enter the development fray, and he sees some important differences between bankers and developers. "Developers are so nimble and non-bureaucratic, not to mention willing to take risks," says Bershad, chairman of the real estate department at Newark, N.J.-based Gibbons DelDeo.

Bershad questions why a bank would forego the lucrative fees that can be generated from mezzanine and land loans in favor of a pure development play. Not only is there elevated risk, he says, but marginal returns do not necessarily justify that risk.

"At the end of the day, being a developer requires more expertise than simply having access to cheap capital," says Edward Indvik, president of Los Angeles-based real estate services firm Lee & Associates. "The bigger risk in my view is to the banks’ balance sheet. Most banks have a significant LTV [loan to value] cushion when they finance a project, so taking on the development and ownership risk could become a problem if things go wrong."