Financial Analysis

SKID ROW HOUSING TRUST PROJECT

The team from the Milano School for International Affairs, Management and Urban Policy was tasked with working with the Skid Row Housing Trust (SRHT) on an affordable housing finance project. This involved researching and recommending alternative funding sources and options for SRHT to improve upon the properties in their portfolio to better serve the needs of its residents.  SRHT was especially interested in the Milano team looking at new, innovative, and diverse ways to sustain their funding streams.

Financial Anaysis
WHY RE-SYNDICATION ISN’T AN OPTION
Among the options that cannot be considered is re-syndication, in which a new series of Low Income Housing  Tax Credits is issued for the property. This is because of  its low attractiveness to private investors. After being financed through an initial series of 15-year tax credits, properties are now owned by SRHT’s Property Management organization in limited partnership with government and private lenders. Re-syndication of tax credits to a new group of lenders would result in subordination of debt among a new set of lenders. In subordination, debt owed to the initial set of lenders on a property is paid first, with future debt holders satisfied afterwards. Thus, it would take longer for those who lend money at a later stage to be paid back. With an understanding of available financing options, the Milano team began to focus on how these strategies could apply to buildings in SRHT’s portfolio. After an examination of the strongest opportunities and discussion with SRHT staff, the Milano team decided to focus on a financing strategy for redeveloping the Produce Hotel. One of the Parsons designers, Yarrow Whitman, developed a design strategy utilizing a Passive House solution, which reduces energy costs (see here). The designer is working on adding two apartments to be adjunct together and provide bathrooms for each of the units, shaped together like Ls. Currently, the units lack their own bathrooms. This design will convert these rooms from SROs to larger efficiency units. Also, part of the first floor will become commercial use for either a barbershop or beauty salon. The number of units will remain the same, with twenty-four rooms constructed in a new wing of the building. Historically, SRHT has relied on much of their public support to come from government sources. Keeping this and the current climate for government funds in mind, the Milano team sought to help SRHT diversify their funding streams. Our team has sought to do this in five ways:

1. GOVERNMENT FUNDS
Like most nonprofits, federal, state, and local funds are what organizations rely heavily on. Los Angeles has a unique political climate where city and county tend to clash with power struggles. The location of Skid Row adjacent to Downtown Los Angeles and political redistricting in Los Angeles County make obtaining public funds quite difficult for SHRT. Some programs are offered by Los Angeles County, but only for certain geographical areas that do not include Skid Row.

Other directions for researching county funds has been incorporated from working with the Parsons  team’s design for the Produce Hotel. One example is the idea to create commercial space on the first floor by adding a barber shop/beauty salon. During our site visit, many residents addressed the need for salons in the neighborhood. Adding this commercial retail space provides employment opportunity for residents. With the idea of increasing employment and meeting residents’ needs, creates a workforce development program targeted for an innovated financial solution from county funds. The following suggested solutions could fund the idea of commercial development and gain federal funds through:

2. PROGRAM RELATED INVESTMENT
Another funding mechanism that may be suitable for SRHT is a “program related investment”, or PRI. This is a loan made by a private foundation to a charitable organization. PRIs usually carry lower interest rates compared to more traditional financing sources such as private financial institutions. Examples of funds  offering PRIs for purposes related to SRHT and our  design for the Produce Hotel are included below:

Ahmason Foundation
Corporation for Supportive Housing
California Community Foundation
Metlife Foundation
Prudential Foundation
Weingart Foundation
S. Mark Taper Foundation

3. ENERGY EFFICIENCY FUNDS
Energy efficiency is a popular topic for funding with many different approaches. Asides from receiving funds for energy efficiency measures, these improvements will also reduce utility expenses and increase  the Trust’s cash flow. SRHT will need to start with a capital needs assessment and energy audit to determine maintenance needs. Depending on the findings of these tasks, SRHT may qualify for any of several programs and incentives that will reduce the cost of implementing energy efficiency measures. Loans and grants are available for energy efficiency from job training to educating residents on how to conserve consumption.

4. WHAT OTHER AFFORDABLE HOUSING ORGANIZATIONS USE
Our research led us to the best practices of similar organizations across the country. This provided us with additional insights on how these properties are developed and expanded the range of options we considered. Organizations that we examined included San Francisco’s Tenderloin Housing Clinic, New York City’s Common Ground, and Interim, Inc. of Monterey, CA. Each of these organizations has recently constructed affordable housing properties using a range of funding sources encompassing public sector funds, private financial institutions, foundations, and philanthropy.

5. PRIVATE PHILANTHROPY
Until recently, SRHT has not needed to focus too much on private philanthropy as a source of funding. Now, with the shifts in funding and politics, SRHT has enlisted a Director of Development and a small team to begin building prospects and relationships at the individual, corporate, and private foundation levels. The Milano team’s hope is to research and provide a list of new sources of private philanthropy funding focusing on: general operating funds, community space funds, and energy efficiency funds. A resource list complete with name, deadlines, award amount, and links to the funding sites will be provided to the SRHT. Additionally, some proposals for how to introduce new people to the SRHT will be provided.

FINANCIAL MATRIX
Here is a presentation of our sources of funds. These funding sources represent the most viable and beneficial opportunities for SRHT to finance the redevelopment of the Produce Hotel. All funding sources are utilized in each scenario. The primary difference between these three scenarios is the amount of money that SRHT must raise through government grants and fundraising.

1. RESERVES
Skid Row Housing Trust Replacement Reserves – SRHT has indicated that a portion of their building  replacement reserves could be used for the project. Estimates were made of the various amounts that would be available.

2. GREEN REFINANCE PLUS
Fannie Mae/FHA Green Refinance Plus Loan – This is a loan program administered by Enterprise and other community lending institutions, suitable for projects that are attempting to refinance and perform energy efficiency retrofits on older affordable, multi-family housing. Our model assumed a 4.5% interest rate on this loan.
3. PRI INVESTMENT
Program Related Investment Funds – Funds that are provided by foundation at below-market rates. Our model assumed a 2% interest rate on this loan.

4. GRANTS AND INVIDIVUALS CONTRIBUTIONS
Grants and Individual Contributions – This represents the amount the organization would be expected to raise through donations from nonprofits and individuals. The tables present our uses of funds for the Produce Hotel. The total cost for improvements to the Produce Hotel is $11,126,817. This consists of approximately $8.5M of hard costs and $2.5M of soft costs, with an average cost of $350/sq. ft.

RECOMMENDATION

We recommend that Skid Row Housing Trust use the Medium Fundraising scenario as a development strategy for the Produce Hotel.  This provides an advantageous debt service ratio and will allow the project to be in a comfortable position to support the current and future debt.

We are further recommending a phased construction approach that utilizes the funding sources and structure of the Medium Fundraising scenario.  This phased approach also provides SRHT with additional flexibility to construct and complete the project in parts instead of as a whole.  The phased approach takes into consideration the time needed to construct each of the different components in the Parsons Team’s innovative design strategy for the Produce Hotel.

We estimate that the first two phases, building a new apartment wing, and converting units in the existing

building to efficiencies, will take approximately one year each to complete.  The latter two phases, redeveloping community, public, and office spaces on the ground floor, and converting the parking lot to semi-permeable paving could be completed in a total of six months. This last phase would facilitate the development of comprehensive community building both locally and in the greater community. The new garden would be the focus of community activities and is a critical component of the design.

NEXT STEPS

In conclusion, we would like to further recommend that the Trust consider these in their next steps toward making this development a reality:

■ Consult with residents to review the design proposals and incorporate feedback.

■ Consider the implications of the models.

■ Further improve fundraising approach and relationships with foundations/philanthropies.  Obtaining funds through either a PRI or traditional fundraising methods will require establishing and strengthening relationships with several philanthropies and foundations.  Furthermore, the diminished state of public sector support and SRHT’s current level of debt service lessen its ability to raise funds through these means. Thus, we believe it is paramount that SRHT continue to focus on obtaining funds through individual and corporate donors as well as private foundations.

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