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2021 Annual Report

Much of what we felt we knew about our life in the Pacific Northwest has changed in the past two years. If 2020 was a mad scramble to adjust to a tsunami of change experienced by every single one of us, 2021 was a year of embedding new behaviors and regaining our footing.

As it was for all of us, it was for Craft3. The year opened with some hope on the COVID-19 vaccine front, and hope that businesses and non-profits might weather the storm. Many, though, continued to struggle to fill in for lost revenue, staffing challenges, and dramatic shifts in their business models. Craft3 responded, remaining fully engaged, disbursing COVID-19 recovery loans through the Small Business Flex Fund in Washington, and offering loan restructures and deferments to our borrowers.

Adam Zimmerman (CEO) and Bruce Brooks (President)

We also saw a shift to recovery and witnessed firsthand the incredible resilience of entrepreneurs and small businesses as they scrapped and innovated their way out of the pandemic and into their next phase of operations. As businesses, non-profits and households persevered and pivoted, access to capital for growth returned to the scene.

This report is a deeper dive into what it means to have access to capital, and how years of systemic oppression have stifled and twisted who has access and who does not. The history is not pretty, and it is hard to hear for some, but understanding the context of the past is critical to making the systems work better for the future. In our own small way, Craft3 took major steps in 2021 to create better access to capital to finance change. We launched new underwriting methods, loan pricing and business services, all with the intent to create more equitable access to capital.

The early results are encouraging. Craft3 made more loans to people of color in 2021 than any year previous. And those businesses have access to better support through services and lower loan rates. But we are only beginning. More investment is needed, and our new Strategic Plan, due out this fall, will not be shy about calling for partners, corporations, governments and communities to keep their commitments to systemic change. As a region we face major hurdles to realize a thriving, just and empowered society, but Craft3 is here, on the track, ready to run. We invite you to join us.

Also, if you haven't already done so, please:

We'd love to be able to keep in touch with you throughout the year.

Sincerely,

Adam Zimmerman, CEO and Bruce Brooks, President

Bruce Brooks joined Craft3 as our first ever President in October 2021. We couldn’t be more pleased! Bruce leads our strategy, innovation, and evaluation efforts, capital development, and our legal and external affairs. He brings a valuable array of skills developed over a career of senior positions in law, finance, public policy, philanthropy, and operations. He’s already proven an invaluable addition!

OUTCOMES

Craft3 uses capital as a tool for social good by investing in businesses, individuals and communities — especially those unable to access traditional financing. Our mission is to strengthen economic, ecological and family resilience across Washington and Oregon.

Craft3 focuses on delivering responsible capital to the many people and places in our region not experiencing economic progress and often struggling to access basic goods and services. By measuring key metrics tied to our mission, we can evaluate our impact year-over-year.

Craft3 has long focused on lending to entrepreneurs of color. In 2019, a group of commercial lenders, underwriters, and portfolio administrators started meeting regularly to discuss how our lending could be more inclusive.

Che Wong, Equitable Lending Program Manager

We know that entrepreneurs of color face additional barriers when it comes to loan readiness, to meeting our underwriting criteria, and to completing our application process. This helped us realize that outreach alone would be insufficient. The Equitable Lending team started researching to:

  • identify underwriting barriers and recommend how they could be minimized
  • learn how we might provide better customer supports and service
  • understand how we can better connect with entrepreneurs of color and better serve them post-loan

Foundational to this work was understanding how we got to where we are today, with entrepreneurs of color facing acute challenges in accessing capital to start or grow a business. Many of these challenges are a result of the profound racial wealth gap. As of 2019, the national median net worth of White households was $184,000, compared to only $23,000 for Black households (see note 1). Writer and policy expert Heather McGhee puts it this way: “Wealth is where history shows up in your wallet, where your financial freedom is determined by compounding interest on decisions made long before you were born” (see note 2).

For black entrepreneurs seeking financing, lower wealth means:

  • less equity to contribute
  • less available collateral
  • and often a less than perfect credit score (even though this may be due to medical bills or other emergencies outside of a prospective borrower’s control)

Notes

  1. "Unequal Starting Points: A Demographic Lens is Key for Inclusive Wealth Building” by Ana Hernández Kent and Lowell R. Ricketts. In The Future of Building Wealth: Brief Essays on the Best Ideas to Build Wealth—for Everyone. Federal Reserve Bank of St. Louis, 2021. Available online.)
  2. The Sum of Us: What Racism Costs Everyone and How We Can Prosper Together. pg. 277.

Reimagining underwriting

We realized that we needed to change our underwriting and make our loans simpler, more affordable and more flexible. In 2021, as the result of a collaborative process and more than a year of work, we changed how we underwrite and process loans up to $250,000 for entrepreneurs of color. We:

  • lowered credit score requirements
  • allowed for higher personal debt-to-income ratios
  • stopped requiring personal collateral for loans under $150,000
  • reduced interest rates to 3-5% fixed
  • waived loan fees, typically 2%, and reduced closing costs to a flat $200 fee

In addition to these changes, we also streamlined the application and underwriting process for all applicants, making for a better customer experience.

Business Services

To support entrepreneurs of color we developed education and coaching services. Aldo Medina Martinez joined Craft3 in 2021 as our first ever Business Services Program Lead. A native Spanish speaker with experience advising and empowering entrepreneurs, Aldo provides one-on-one coaching and loan readiness support to entrepreneurs of color. Aldo also coordinates business resources, including referrals to a network of culturally competent professional service providers, with subsidies for low-income entrepreneurs.

Aldo Martinez, Business Services Program Lead

2021 Results

  • 54 loans under $250,000 to entrepreneurs of color.
  • Over $6 million in lending — more than double our annual average of lending from 2017-2019 for loans under $250,000 to entrepreneurs of color.

These loans are making a difference in communities across Oregon and Washington. The case study that follows offers an in-depth look at our lending in Seattle along with a deeper dive into the history of economic segregation and inequity.

Consumer Lending

Non-White homeowners face similar barrier accessing capital as do non-White entrepreneurs. For homeowners, an inability to access affordable capital to fund repairs, make improvements, or build an accessory dwelling unit can mean that safeguarding and investing in their homes is out of reach. This can exacerbate inequities, as homeowners able to qualify for a home equity line of credit or those who have other sources of wealth will be able to undertake projects to keep their homes comfortable and safe, while others will not.

To make our consumer financing more equitable, we charge lower — not higher — interest rates to lower-income borrowers. We no longer use FICO credit scores in underwriting our Home Energy loans. Our Clean Water loans have low equity requirements, and we are understanding of past credit challenges, so long as we see an ability to repay the loan.

An Accessory Dwelling Unit Loan helps a North Portland resident create needed housing and invest in his property.

In 2021, 16% of our consumer loans were to non-White borrowers. For context, 2019 census data indicates that 16% of people in Oregon and 25% of people in Washington identify as non-White.

Looking Forward

We are continually evaluating and learning. We’re currently focused on improving our loan servicing and customer experience post-loan closing. The Equitable Lending Initiative work would not be possible without our current and future funding partners. Their support lets us offer subsidized interest rates and business services support. If you'd like to receive updates about our Equitable Lending Initiative and more, please

Funders and Supporters

We’d like to thank the following organizations, banks, and foundations for their invaluable assistance and for their belief in this work.

  • Banner Bank
  • Capital One
  • CDFI Fund
  • Community Foundation for Southwest Washington
  • JPMorgan Chase
  • Murdock Charitable Trust
  • Opportunity Finance Network / Google
  • Oregon Metro
  • Pacific Premier Bank
  • Umpqua Bank
  • Wells Fargo

To make sense of the racial inequities of the present, to know why Craft3 and many other organizations believe systemic changes in lending are needed, we need to understand the history that got us to where we are today.

The racial history of the South, where slavery was the law of the land, is familiar to many. Less familiar and perhaps surprising is the racial history of America’s North, which was also profoundly segregated and inequitable.

In most northern cities and states, policies and practices such as redlining, racial restrictive covenants, Jim Crow stores and hospitals that excluded blacks, sundown rules, and segregated schools meant that everyday life and opportunities of all sorts were profoundly limited for Black people.

Seattle, Washington was no exception. The full history of racial segregation and inequity in Seattle is too complex to recount here. Instead, we’ll focus on how redlining — a practice of assessing neighborhood quality begun during the New Deal — shaped neighborhoods, wealth, and demographics in ways that are still felt today.

As you will see below, Blacks were systematically excluded from home ownership, foreclosing a principal avenue of wealth creation. What happened in Seattle happened in cities across the country.

REDLINING

The practice that later became known as redlining — because of the red color used to indicate undesirable neighborhoods — began as part of an effort to stabilize the housing market during the Great Depression. The Roosevelt Administration established the Home Owners' Loan Corporation (HOLC) program in 1933 to refinance mortgages for struggling banks and homeowners.

HOLC created maps for many cities designed to manage risk by assessing neighborhood desirability. You can see in the 1936 HOLC assessment of Seattle that the city was carved up into areas designated as best (light green), still desirable (blue), definitely declining (yellow), and hazardous (red).

Home Owners’ Loan Corporation (HOLC) Security Map and Area Descriptions, January 10, 1936. Available online.

The rating system was based on housing quality, recent sale and rental prices, and also the racial and ethnic composition of neighborhoods. The mere presence of non-White or White ethnic groups such as Jews and eastern Europeans was sufficient for a neighborhood to be defined as definitely declining or hazardous.

These designations had profound impacts. If you lived in a redlined hazardous area, you would likely be unable to qualify for a mortgage. Obtaining a mortgage was made even harder when the Federal Housing Administration, created as part of The National Housing Act of 1934, decided not to provide mortgage insurance in neighborhoods where racial and ethnic minorities lived.

THE CENTER OF BLACK SEATTLE

Just a few decades later in 1970, you can see that Black residents were concentrated in the areas marked as “hazardous” — in the redlined zones of the 1936 map that correspond to the Central District. The map below shows the percentage of the population in each census tract that was Black. The Central District ranged from just under 50% to 90% Black. Sixty two percent of Seattle’s Black residents lived in just seven census tracts within the Central District. (History of the Central Area, Thomas Veith. Historic Preservation Program, City of Seattle Department of Neighborhoods, 2009. Available online)

Source: James Gregory, “Seattle's Race and Segregation Story in Maps 1920-2020,” Seattle Civil Rights & Labor History Project (https://depts.washington.edu/civilr/segregation_maps.htm).

The Central District received little investment in community amenities or public goods, and it was home to highly segregated schools. At the same time, it was the geographic and cultural center of the Black community in Seattle, home to churches, restaurants, parks, houses, and apartments.

Discriminatory housing practices significantly shaped the Central District. In 1968 the Fair Housing Act made housing discrimination based on race, religion, national origin or sex illegal. Change was slow however, and Black homeownership still lags significantly behind White homeownership.

There was no abrupt end to racist housing practices and their impacts are felt today. Blacks still found it hard to obtain mortgages and in the housing bubble leading up to the Great Recession, they were more likely to be steered toward subprime mortgages even when they qualified for prime mortgages.

HOMECOMING

Rising property values and rental prices increased the housing cost burden and pushed many lower income residents out of the neighborhood. Between 1970 and today, Seattle’s Black population has moved southwards into the Rainier Valley. These conditions also created new interest in both residential and commercial real estate development in the Central District.

The same factors that made housing unaffordable for many also affected commercial real estate. Legacy Black-owned businesses faced pressures as real estate development was accelerating and commercial real estate was becoming more costly.

As part of our Equitable Lending Initiative, Craft3 focuses on commercial lending in and around the Central District. These loans are designed to:

  • preserve existing Black-owned businesses
  • help legacy Black-owned businesses return
  • launch new Black-owned businesses

The map below shows the business loans we’ve made in Central District businesses. The entrepreneurs highlighted below are pillars of this vibrant community. Their successes have created jobs and fueled interest in the Central District, while their advocacy and community engagement have benefited residents and other entrepreneurs.

1. Earl’s Cuts & Styles

  • $150,000 loan
  • $165,000 other funds leveraged
  • 2 jobs created or retained

A Craft3 loan helped Earl Lancaster relocate his shop in business since 1992. Earl’s is a Central District institution and Earl has trained many barbers over the years, some of whom have since established their own shops.

2. Marjorie

  • $245,000 loan
  • $28,000 other funds leveraged
  • 16 jobs created or retained

Marjorie’s food pay homage to the Jamaican dishes owner Donna Moodie grew up eating and making. Donna is an active community member, serving on several Boards of Directors and she’s the Executive Vice President of Community Development for Community Roots Housing.

3. Communion

  • $153,000 loan
  • $1.3 million other funds leveraged
  • 27 jobs created or retained

Kristi Brown and her son, Damon Bomar, opened Communion in December 2020 and her “Seattle Soul” food and welcoming atmosphere earned praise from far and wide. A Craft3 loan funded equipment purchase and working capital for the restaurant housed in the Liberty Bank Building.

4. Jackson’s Catfish Corner

  • $100,000 loan
  • $794,000 other funds leveraged
  • 8 jobs created or retained

Terrell Jackson grew up working in his grandparents’ Central District restaurant — Catfish Corner. A Craft3 loan helped him come home and open his own restaurant — Jackson's Catfish Corner.

The Central District is a powerful example of how a cluster of investments, made over years, can have positive impacts that ripple outwards, across a neighborhood. Our ongoing work in the Central District is helping Black-owned business stay in, and in some cases return to, this historically important neighborhood.

“We support the Craft3 community by providing resources, facilitating dialogue, modeling a commitment to anti-racism growth and learning, and advocating for more equitable policies and practices. We exist not to do the work, but to create the space for this work to happen in relationship and community.” — Anti-Racism Committee Charter

In 2020, after George Floyd’s murder, Craft3 staff met virtually and proposed forming a group focused on equity, inclusion, and anti-racism. Management responded enthusiastically and the Anti-Racism Committee (ARC) soon launched.

ARC’s work is consensus-based and deliberate. The committee focuses on internal operations, policies, and behaviors with the goal of building anti-racism into our internal operations, much as the Equitable Lending Initiative aims to build anti-racism into our lending. Looking ahead, it will focus on internal communications, onboarding new employees, and establishing ongoing race-based affinity spaces to allow for discussion and exchange. This work will be led by subcommittees that include the wider staff, with ARC members assigned to each to provide support and connection to the overall anti-racism effort. The subcommittees promote greater involvement by all staff in our ongoing learning about anti-racism.

Training and coaching

Early on, ARC realized the value in working with an external facilitator and guide. Paradigm Shift Seattle, a BIPOC owned consultancy, led education and discussion sessions for staff with the goal of helping us create a shared understanding around race, power and oppression. This work has been fruitful and has included race-based affinity groups and training sessions for all managers. The ARC and its subcommittees are working with Paradigm Shift Seattle to build skills and knowledge so that we can carry on the work on our own.

Company policies

As a result of ARC’s work, Craft3 revised its recruitment process and adjusted the education requirements listed on job descriptions to make them accessible to more applicants. Craft3 also expanded its employee sabbatical policy. All employees are now eligible for paid sabbaticals ranging from 4 to 12 weeks, after 10 years of continuous service with Craft3.

We are in the process of evaluating outside auditors to do a full pay equity audit that will review any potential pay gaps based on race as well as gender, age, geography, or any other characteristic the auditors identify.

*The Consolidated Statement of Financial Position and Consolidated Statement of Activities presented were audited by Moss Adams, LLP. These have been derived from the complete financial statements, which are available online at www.craft3.org/results.

Special thanks to the businesses who let us share their stories: Earl’s Cuts & Styles, Marjorie, Communion, and Jackson's Catfish Corner. Thanks also to the many Craft3 staff who contributed to this Annual Report and to our work throughout the year. We'd also like to give a shout out to our many partners. We appreciate you all!