How Union Bank is Rethinking Affordable Housing in California

There are no vacancies at the Birch Hills Apartment Homes, and it isn't hard to see why. Just 10 miles from Disneyland, in Brea, Calif., the recently built, family-oriented property offers a swimming pool, computer lab and plenty of recreational space.

Rents are comparatively affordable by design, ranging from $500 a month for a one-bedroom apartment to $1,050 a month for three bedrooms. Many of the development's low-income residents work at nearby retail stores and otherwise would have a tough time paying rents in the area, which typically are more than double the rates here.

The Spanish-style apartments are in such demand that there's a waiting list of more than 1,000 hopeful renters trying to get in.

"It's essentially recession-proof," says Annette Billingsley, executive vice president of community development finance at San Francisco-based Union Bank, which helped fund the complex. "It's a profitable business, and the reason it's profitable is because it's low risk."

But in California, affordable housing projects like this one are now in jeopardy.

Billingsley and other community development bankers in the state were thrown a curveball two years ago when California dismantled its redevelopment agencies, cutting off $1 billion in funding for affordable housing. As a result of the policy changes, developers are scrambling to finance nonprofit projects with lighter government subsidies or are rehabilitating older apartments, rather than building new ones.

"It's a huge challenge," says Billingsley, who oversees Union Bank's $3 billion investment in affordable housing. "Most of the deals [Union has done] had a slug of redevelopment money, so we'll definitely see fewer projects going forward."

When Birch Hills went up in 2012, Union Bank provided $18 million in construction financing and $11 million in low-income tax credit equity, as well as another $8 million in permanent financing. The city of Brea donated the land and provided $4.75 million in redevelopment funds. It is unclear whether the complex could get built today, without the financing from the redevelopment agencies. With this funding source gone, projects like the one in Brea are expected to become much rarer.

Ronne Thielen, a longtime affordable housing advocate and an executive vice president at R4 Capital, an affordable housing tax-credit investment management firm, says that until the recent changes, redevelopment agencies had provided as much as 30% of the financing for affordable housing projects in California.

"It's been a deal killer," she says of the agencies' dismantling.

For Billingsley's group, which made loans to or invested in tax credits in 24 affordable housing projects last year, markets outside California may help pick up at least some of the slack. The group closed on an equity investment in New York in the fourth quarter, and it is expanding into Oregon, Texas and Washington.

But the majority of its projects are in California, where the bank, a subsidiary of Japan's Mitsubishi UFJ Financial, has 447 branches.

Billingsley is hopeful that California's state legislature will pass a bill that would restore about half of the funding for affordable housing that was cut off when the redevelopment agencies were dismantled. The proposal seeks to raise money by charging a $75 recording fee for real estate documents such as deeds, declarations of homestead and notices of default.

The bill, SB 391, is not without its critics or controversy, however, and its passage is uncertain.

In the meantime, Billingsley is searching for more permanent financing at the state and local level to replace the community redevelopment funds that have been lost.

Some cities, including San Francisco and Seattle, have created their own housing funds that potentially could be tapped. But in the end Union may be forced to scale back on some deals, focusing on rehabilitating older buildings rather than financing new ones or paying more for low-income housing tax credits, a class of instruments designed to incentivize private investment in affordable housing.

"The pipeline going forward is tougher and tougher," Billingsley admits. "Our clients are all looking for more funding sources."

The loss of California's redevelopment agencies comes at the same time as larger demographic and economic shifts that are swelling the ranks of low-income Americans—and the demand for affordable apartments.

The number of renters with very low incomes—less than 30% of the local median, or about $19,000 a year—jumped by 3 million to roughly 12 million between 2001 and 2011, according to a report released this month by the Joint Center for Housing Studies at Harvard.

But the number of affordable rentals has remained unchanged at about 7 million units. The gap between the supply of affordable rental housing and demand is probably even wider than the statistics indicate, because about 2.6 million of affordable rentals are occupied by higher-earning households that are essentially "crowding out" those with the lowest incomes, the Harvard study found.

Fred Copeman, a principal at the accounting firm CohnReznick, called the shortage of affordable rental housing "critical and severe," and estimates the United States needs to build another 6 million to 7 million units to keep pace with demand. But the primary source of federal funding for affordable housing, the Low Income Housing Tax Credit Program, has not adequately addressed the gap.

"The amount of affordable rental stock is nowhere near where it needs to be," says Copeman, who heads CohnReznick's tax credit investment services.

Another hurdle is the rising cost of low-income housing tax credits.

For years, lenders like Union Bank, Wells Fargo and JPMorgan Chase have been competing to buy up low-income housing tax credits because as equity investors they receive a dollar-for-dollar credit against their federal tax liability. Even more enticing, the banks receive credit under the Community Redevelopment Act for making the investments.

The tax credit investments provide a nice rate of return for banks, in a range of 5 percent to 8 percent nationally, according to Johanna Gullick, an area manager in Billingsley's group at Union Bank.

But fierce competition has driven up the cost of the tax credits, especially in high-cost California.

"Demand is huge but the process of getting CRA credits is a difficult one," says Billingsley. "There is hope that this is a good way to stabilize communities, but there needs to be a way to expand CRA credits."

The housing tax credits are doled out to state housing finance agencies based on population. But to receive CRA credit, banks have to make the investments in their designated assessment areas, and the projects must be built in the designated assessment areas, which typically skew toward larger cities. So in a metropolitan area like San Francisco, nearly 20 banks may be competing against each other for credits, and the projects themselves get concentrated in larger markets. Newly issued regulatory guidance could change that imbalance, but it will take time for the changes to take hold.

For all of the current challenges in the world of affordable housing finance, Billingsley says it remains a rewarding line of work that often creates camaraderie among the teams of bankers, developers and city officials working on projects intended to serve some of their communities' neediest members. "These are such deep relationships," she says of the ties among players in the community development finance arena.

"There's definitely a 'greater good' kind of aspect to this business," adds Billingsley, who is on the Board of Governors of the California Housing Consortium, an affordable housing industry advocacy group, and on the advisory committee to the Bay Area Local Initiatives Support Corporation, which works with public, private and nonprofit partners on community initiatives and investments.

"It's just an appreciative group of people. There's a better balance about collaboration and civic-mindedness. You're forced into being a much more multidimensional banker."

It took nearly six months to learn the nuances and financing structures of the affordable housing business, says Billingsley, who has a B.S. in economics from Arizona State University and an MBA in finance from Penn State University and oversaw national real estate lending at Union Bank for more than 14 years before entering the world of community development finance.

Billingsley began her career as a trainee at the bank in 1984, but she went on to work for other institutions including Security Pacific Bank and Credit Agricole. Her assignments included two years spent in Paris, where she coordinated the workout of a U.S. and U.K. real estate portfolio.

She came home to Union Bank in 1995, cultivating its national lending platform in real estate before taking over for Jim Francis, a co-founder of the bank's community development finance group, after he was promoted to another role at the bank.

"It's probably been my best career move," the 57-year-old Billingsley says.

In taking on community development work, "there was this notion that you could really be appreciated."

Kate Berry covers mortgages for American Banker and National Mortgage News.