magazine - Union Bank

April 2014
americanbanker.com
magazine
THE
NEW
DEAL
ON
REAL
ESTATE
From affordable housing to CRE, lending
businesses are being changed by
demographic and public policy shifts.
Annette Billingsley
EVP, Community
Development
Finance
(Union Bank)
NAVIGATING
CHANGE
Annette Billingsley
Executive Vice President
Community Development Finance Union Bank
At the Midpen Housing’s Station Center apartment project the Bank
helped finance in Union City CA.
BY
KATE BERRY
CALIFORNIA’S AFFORDABLE
HOUSING SCENE WAS
UPENDED BY A SHIFT IN
PUBLIC POLICY. UNION BANK’S
ANNETTE BILLINGSLEY SORTS
OUT THE REPERCUSSIONS.
PHOPTOGRAPHY BY
ERIC MILLETTE
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.
R
ents 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 curve ball 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 lowincome 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.”
Billingsley
at a Union
Bank
Branch
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.
“It’s been a deal killer,” R4 Capital’s
Ronne Thielen says of the california
agencies’ dismantling.
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.
©2014 SourceMedia Inc. and American Banker Magazine. All rights reserved. SourceMedia, One State Street Plaza, New York, N.Y. 10004 (800) 367-3989