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Real Estate Impact | February 14, 2024


SDS CAPITAL DEPLOYS PRIVATE EQUITY TO FINANCE PERMANENT HOUSING FOR HOMELESS
CALIFORNIANS

Roodgally Senatus
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Photo by SDS Capital Group.


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IMPACTALPHA EDITOR

ROODGALLY SENATUS


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ImpactAlpha, February 14 — California has the largest homeless population in the
US with over 180,000 people living in shelters, tents, cars, under highways and
other public places. On any given night in Los Angeles last year, more than
75,000 people were unhoused. 

The Golden State’s homelessness crisis has snarled local politics as the chronic
shortage of low-income affordable housing has worsened and pandemic-era
government subsidies to create temporary public housing for at-risk families has
run out. 

Developing affordable, supportive housing for marginalized families often
requires subsidies or grants to cover construction and operating costs. Even for
dedicated developers, the hunt for public funding and grants can take months and
even years and incur a mountain of legal fees. 

SDS Capital Group, a female-led impact real estate fund manager based in Los
Angeles, is demonstrating a model it says can more quickly and cost effectively
create permanent housing for the homeless, using exclusively private capital.
SDS has so far financed four projects that will provide 203 units of housing to
formerly-homeless residents in Los Angeles this year. 

Photo provided by SDS Capital Group.

“We have to find better, scalable, more cost effective ways to build housing for
those who are homeless,” says SDS’ founder and CEO Deborah La Franchi.
“Especially in LA County, California’s homelessness problem, it’s completely
broken.”

La Franchi closed SDS’ Supportive Housing Fund in October 2021 with $150 million
from mainly banks and foundations, including Kaiser Permanente, California
Community Foundation and First Republic Bank. SDS reopened the fund last year to
raise another $40 million to feed its pipeline of development projects.

The Supportive Housing Fund is helping fill a gap in permanent housing for
individuals that may have mental health and substance-abuse issues but are able
to live independently. The Supportive Housing Fund’s first 11 projects will
provide 835 units of permanent housing for formerly-homeless families, which
will receive access to mental health support, substance abuse treatment,
healthcare, 24-hour case management, job training and other onsite critical
services from SDS’s nonprofit partners. 

La Franchi acknowledges those projects make only a small dent on a much bigger
problem. 

“We cannot build our way out of it. For every homeless person we house, there’s
more than one coming into homelessness,” La Franchi told ImpactAlpha. “When I
drive around LA, these are people that aren’t functioning. The mental illness
and the drug abuse is so deep, they’re kind of comatose.”

“That’s a bigger tragic situation that we need to deal with as a country.”

> Kaiser Permanente allocates another $200 million to affordable housing for
> health


PRIVATE FINANCING

The Supportive Housing Fund is looking to finance the construction of at least
2,000 units over four years. This year, the fund will finance four projects,
which upon refinancing, will free up cash for another four projects.

How it works: SDS covers up to 97% of construction costs, while its development
partner RMG Housing Construction comes up with the rest. SDS has secured free
land-lease deals with several churches in LA to build permanent housing for the
homeless on their parking lots. 

Photo provided by SDS Capital Group.

“There’s no outside money involved, and that’s intentional so we can have
velocity in this model,” La Franchi says. “If RMG finds a site and puts in an
option to purchase it, we can underwrite and close it within 30 days, without a
division of expensive professionals to chase down debt and equity capital.”

The pace at which SDS is able to close land deals and begin construction on
projects significantly reduces the cost to build. RMG claims its projects cost
$220,000 per unit, on average, compared to per-unit costs of $550,000 for
projects funded by subsidies, such as Low-Income Housing Tax Credits and the
city of LA’s Proposition HHH Supportive Housing Loan Program. 

Formerly-homeless tenants use Section 8 vouchers to pay rents for a unit, which
are typically 500 square-foot, one-bedroom apartments. “Without the vouchers,
our model doesn’t work,” says La Franchi. 

Ultimately, La Franchi’s goal is to provide market-rate returns to investors.
“We didn’t get $190 million grant money. That’s $190 million we have to return
to our investors with the risk-adjusted rate of return,” she says. “At the end
of day we’re creating housing for homeless individuals, and we want to create as
much as we can with $190 million.”


FAMILY OF FUNDS

La Franchi launched SDS in 2001 after a brief stint in government as assistant
deputy mayor to late LA Mayor Richard Riordan. La Franchi helped launch three
government funds at the time, including what she calls “the country’s first
workforce housing fund, before people even knew what workforce housing was.” 

“I said, ‘Oh my gosh, I love what I’m doing’ and completely pivoted my career
out of government and started SDS Capital Group, with the vision of creating the
type of funds we had done in LA, but doing them nationally.”

SDS currently manages over $1 billion in assets across a portfolio of six impact
funds and co-investment vehicles. The firm’s Sustainable Communities Fund, a
nonprofit foundation fund launched in 2011, has tapped $7 million of SDS
Capital’s New Markets Housing Tax Credit exit fees to provide flexible financing
to microfinance institutions in distressed communities. 

The fund has backed Grameen America, the US affiliate of Muhammad Yunus’ Grameen
Bank, to provide microloans to low-income women business owners. It also
invested in Finca International to lend to micro-enterprises in Haiti following
the 2010 earthquake. 

> Grameen America raises $17.5 million for second microfinance fund

SDS Capital’s latest fund, American South Fund Management, is a joint venture
with New York-based real estate firm Vintage Realty Company tackling lack of
access to affordable housing in low-income and majority-minority communities in
the southern US. 

American South Fund Management has deployed $106 of mezzanine debt, preferred
equity and equity capital in 22 affordable housing projects, with over 5,000
units for low-income families in southern states including Alabama, Florida,
Georgia, Louisiana, North and South Carolina, Tennessee and Texas.

The joint venture last week raised $174 million, anchored by $50 million in
pension fund capital managed by GCM Grosvenor, a Chicago-based firm that manages
over $5 billion of real estate emerging manager programs on behalf of
institutional investors. The New York State Common Retirement Fund is one of the
indirect LPs in the fund. 

> Elevating our collective leadership and accelerating our shared momentum at
> the GIIN Impact Forum

La Franchi aspires to compete with other large real estate fund managers for
mandates at that institutional level. “We can’t grow if we can’t get to these
investors,” she says. “I need pensions. I need insurance companies. That’s how I
can have more impact, but it’s a huge barrier.”


CATALYZING UNDERREPRESENTED DEVELOPERS

At the investment level, La Franchi is looking to build a pipeline of diverse
real estate developers, particularly women developers and developers of color,
who face gender and racial biases in raising capital. 

“Ironically, I struggle to find women developers,” says La Franchi, and out of
the 112,000 real estate development firms in the US, just 1,000 of them are
minority-owned. 

SDS recently backed VPG Enterprise, a Black-owned residential housing
development firm in New Orleans. “They’re buying broken motels and multifamily
buildings, and cleaning them up to build really quality low-income housing and
they could not get equity capital,” La Franchi says. 

SDS came with that first injection of equity capital to help VPG get its first
set of projects underway. The firm also backed a woman affordable housing
developer in Texas as their first equity backer. 

“I hope literally in 10 years, we’re plugging $30-$40 million into their
projects,” says La Franchi. “Just like it was so hard for me to get SDS to the
next level because of capital barriers, we want to help them get to the next
level.”

TAGS:

affordable housing



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