How Seattle is Addressing the Affordable Housing Crisis

Seattle’s 13.1% increase in home prices has led the nation for 20 months in a row, just ahead of Las Vegas and San Francisco. One of the unfortunate results of record price increases in booming metropolitan areas is the lack of affordable “workforce” housing for individuals.  Seattle and our region provide vivid examples of the affordability gap playing out across the county—while wages for workers in Washington State in 2017 grew at their fastest rate since 2007 (5%), statewide increase in home prices more than doubled that amount.

There are significant short and long-term social costs when people cannot afford to rent (or purchase) housing in the communities where they work. A recent report from a Harvard housing research group succinctly addressed the consequences of an inadequate supply of affordable housing: Good-quality, safe, and affordable housing is fundamental to personal well-being and security. But for millions of US families and individuals, paying today’s high housing costs means sacrificing on food, healthcare, savings, and other essential expenses. Worse still, these cost-burdened households are increasingly concentrated in high-poverty neighborhoods, which further undermine their health, safety, and access to economic opportunity.

There have been a number of initiatives over the years to attract private investment in affordable housing. Examples include the federal low income housing tax credit program; the new “opportunity zone” initiative which gives favorable capital gains tax treatment to investors in federally designated disadvantaged areas, some of which contain underutilized housing stock ripe for redevelopment; and the Community Reinvestment Act incentives discussed in this article.

The Community Reinvestment Act (CRA) was enacted in 1977 to encourage banks and other federally insured depository institutions to meet the credit needs of the communities in which they operate, including low and moderate income areas. The CRA requires a periodic evaluation of each depository institution’s track record in meeting the credit needs of its entire community, the results of which are taken into account when considering applications by the institution for approval of new branches, mergers and acquisitions. A bank’s investment in affordable housing-related nonprofit organizations or equity funds that in turn invest in projects that provide affordable housing to low and moderate income individuals will receive positive consideration under the CRA regulations, provided the investment benefits one or more of the Bank’s assessment areas.  Investment in nonprofits that are community development financial institutions (“CDFI’s”) often takes the form of Equity Equivalent (“EQ2”) investments.  An EQ2 is a long term-fully subordinated debt instrument with features such as rolling terms and limited acceleration rights that allow the investment to function in a manner similar to equity—enabling the CDFI to leverage the investment with senior debt and build its lending capacity. The CDFI benefits from the increased lending capacity and the bank making the investment benefits from the expertise of the CDFI in lending in the assessment area.

Properly utilized the CRA is an effective tool for lenders to help address the housing affordability crisis, not only in booming metropolitan areas like Seattle, but also in areas of the country that desperately need institutional investments to re-vitalize their communities.

Doug Prince is a Shareholder in Buchalter’s Seattle office and a member of the Firm’s Real Estate Practice Group. Jeffrey Frank is the Managing Shareholder of Buchalter’s Seattle office and a member of the Firm’s Real Estate and Litigation Practice Groups. The views expressed here are the author’s own and not that of ALM’s Real Estate Media.