Providing Hope: Los Angeles Youths to Benefit from New Job Training Facility
By Caitlin Jones
5 min read
Unemployment has been tough for Americans in general. But for young adults the picture has been even rougher. And when you throw in youths “aging out” of foster care – turning 18 – the odds are brutal.
That’s why the YWCA of Greater Los Angeles, with the help of the federal new markets tax credit (NMTC), is building a new state-of-the art facility to house and expand its renowned Job Corps program providing jobs training and shelter for young adults, including foster care graduates. Expected to be completed in the fall of 2011, the seven-story building will contain 60,000 square feet of commercial and 69,000 square feet of residential space, including 200 two-person dorm-type rooms for students, plus health, kitchen, dining, and recreational, facilities, classrooms, library, lounges, and study rooms. The facility will consolidate space and activities now at six different sites.
The $78 million deal, which closed in December, wasn’t easy to put together. At the National Housing & Rehabilitation Association’s 2010 Annual Meeting in Miami Beach, participants described the challenges of the transaction, the solutions, and the lessons learned.
“This was one of the more challenging projects that I have ever been involved in,”said Leigh Ann Smith, of Bank of America Merrill Lynch. “And a sheer part of that had to do with the sheer number of entities that were involved. We had four different CDEs, two investors, eight sources of subordinate financing, and a number of government agencies.”
The YWCA of Greater Los Angeles has operated a Job Corps training program since 1965 for the U.S. Department of Labor (DOL). “They take students and kids who age out of foster care, people 16 through 24, and other people who are in need of a second shot, and put them through a residential job training program,” said Smith. Students graduate with various skills – culinary, technical, etc. – and the YWCA helps them find a job. Students live at the facility while attending the program.
The YWCA has been operating the program out of a building that is aged and doesn’t meet all earthquake code requirements. “So the Y decided they would rather build a new facility that would house the students as well as provide space for all of the technical programs that they offer,” Smith noted.
Four community development entities (CDEs) provided NMTC allocation authority for the project: Bank of America Merrill Lynch; Enterprise Community Investment, Inc.; Local Initiatives Support Corporation; and the Los Angeles Development Fund, an arm of the city. Bank of America and JP Morgan Chase are the NMTC equity investors. In addition, Bank of America is providing a construction loan, a $14 million permanent mortgage, and a bridge loan.
Other Challenges
Besides the complexities from numerous entities and funding sources, Smith said other challenges were that:
- The YWCA couldn’t take refinancing risk on one of its subordinate financing sources. It needed both seven-year NMTC debt and a permanent loan take-out, which Bank of America provided.
- DOL’s 20-year lease of the new facility from the YWCA can be canceled at any time. To resolve this, DOL agreed to pre-fund $20 million of its future lease payments. These monies were used for a leveraged loan for the project; the YWCA and Bank of America funded two other leveraged loans as well.
- The YWCA, a social services provider, had limited real estate development experience, and had never done an NMTC project before. “They had done a little bit of development, but not a lot,” said John Ducey of Enterprise Community Investment, Inc. The solution was to bring in other partners with experience in developing and financing NMTC mixed-use deals – CDEs, lenders, investors, attorneys, and a consultant.
Ducey indicated there was also initial concern about whether all of the participants, including the subsidy sources and government lenders, could work together effectively on a complex deal. As it turned out, this wasn’t a problem; there were firm timelines, weekly conference calls, and aggressive “conversations offline,” he said.
Smith and Ducey said that there wasn’t an issue with the NMTC program’s “80/20 test” – a project is ineligible for the NMTC if more than 80% of the financed facility’s income comes from residential rents. DOL’s lease was structured as a commercial lease. In addition, the residential component is incidental to the commercial purpose – the job training program. Students will only live in the facility while attending the program and will not pay rent.
Ducey said it was “fairly simple” to satisfy the “but for” test – that the project wouldn’t be possible if it weren’t for the NMTC. He pointed to the massive amounts of funding provided for the project, including a “boatload of subsidies.” In addition, the project will create “significant, significant community benefit,” Ducey said. “There’s a vulnerable population that will get critical job training and find jobs because of that.”
Lessons Learned
Smith cited several lessons from the transaction that could be of value to other developers thinking of doing a new markets project. First, there are still banks making leveraged loans, although they are “more picky” today about the deals they choose. Second, identifying and addressing potential risks in a proposed project is vital; as an example she cited the termination option in DOL’s lease. “When you’re going out and talking with CDEs, lenders, and investors,” Smith said, “put yourself in their shoes and think through, if this was my money, what would be important to me? How can I help to mitigate those risks?” She added, “You have to be aware of the environment that we’re in and the more conservative underwriting standards that apply.”
Finally, Smith advised developers to bring a project that will enable potential funding partners to “tell a good story” – to the Community Development Financial Institutions Fund, to their banking regulators (if applicable), and to the communities they serve. “Helping your partners to be able to tell a good story will go a long way in helping you to secure that type of financing.”
