Deborah La Franchi, founder and chief executive of Westwood-based real estate fund manager SDS Capital Group, has always been focused on poverty alleviation, especially through housing.
Following graduation at Georgetown University, La Franchi worked for the then-mayor of Los Angeles, Richard Riordan, investing in distressed communities in South and East Los Angeles.
La Franchi helped establish Genesis LA Economic Growth Corp., a downtown-based nonprofit founded by Riordan in 1998 that specifically focused on bringing in private sector funds to create jobs in L.A. La Franchi launched three different funds under Genesis LA and ultimately went on to become its chief executive before creating SDS in 2001 with one goal: engaging the private sector in the battle against poverty.
The firm currently manages nearly $1.7 billion in assets under management across its multiple impact funds, each of which targets a different need in eliminating homelessness. It has financed over 8,000 units of affordable, workforce and permanent supportive housing units and has created over 24,800 jobs total.
La Franchi spoke with the Business Journal about the need for more affordable housing, the challenges the market faces and SDS’ growth.
Tell me about your various impact funds. What kinds of assets do you lend on and who are your clients?
Typically, we are actually providing equity rather than lending. We have six different financial platforms and most of them are real estate focused. The one here in California, that’s doing a lot of Los Angeles investing, is $190 million and we are focused on financing projects that are 100% tenants needing permanent supportive housing. We’re housing the unhoused, so it’s got a very narrow focus.
We have another set of funds in the Deep South, 10 states from Texas to Florida to North Carolina, and we’re now launching fund three.Fund two was $174 million and that (was to) invest in affordable housing using private equity in the Deep South. And then we have one fund (National New Markets Fund) that’s purely manufacturing, and we’re investing in very poor communities, urban and rural (areas) in the Deep South and the Midwest, to create manufacturing jobs because manufacturing jobs are very good jobs for individuals with a high school or less degree – they receive benefits, strong wages. We’re really trying to keep manufacturing here in the United States.
That’s quite a big range. Tell me about your geographical interest.
When I started SDS Capital Group in 2001, I didn’t want to become a competitor to Genesis LA – I helped launch it. I worked closely with their board of directors and the mayor’s team in launching this nonprofit. I didn’t want to be in the same market competing with them.
For 19 years, I didn’t do any business in Los Angeles. I went to other markets where there was deep poverty, and they needed capital tools such as these … 19 years later, my community has encampments everywhere. I live in Mar Vista, and I could drive 10 seconds in any direction and there was an encampment … I sort of rethought my own internal moratorium on coming into the Los Angeles market that I had put in place 20 years earlier. I just said, ‘I think Los Angeles needs this. My community needs this.’
Why do we need more affordable and permanent supportive housing?
It’s very dangerous for society when it becomes so stratified – haves and have nots – and certainly it’s happening here in California. The missing middle, the middle is leaving. I believe deeply that a strong civil society, a strong community, a great country, is built upon making sure that you don’t have just the extremes. And if we don’t have enough jobs with quality wages and we don’t have enough affordable housing, people hit the precipice.
If you look across the country where homelessness is the worst, it’s where you have very low vacancy rates so a shortage of overall housing and there’s study after study on this. If we want to solve the homelessness issue, we absolutely need to focus on affordable housing. Get to people before they become homeless. Once they’re on the streets, all these other conditions become more challenging from addiction issues, mental illness issues, (etcetera).
What do you think is the biggest threat to their new development?
Right now, we have a national shortage of 7.3 million affordable housing units. It’s a really serious issue. Here in California, we have over 180,000 unhoused (individuals). From the perspective of building more affordable housing, California has so many challenges. The dirt is expensive, the taxes are high, the development process is slow (and) inflation has really made these projects difficult to pencil.
More locally, it only gets worse. ULA, while very well intentioned, the 5% gross received transfer tax is 5% off the sale of the property, not on the profits of the property – that’s a big difference. Almost all the multifamily developers I know are now redlining the city ballot for this reason because you can go to El Segundo, you can go to Burbank, you can go to the separate city of San Fernando, Santa Monica, you can go to all these other places that have identical demographics and the land is pretty much the same, but you don’t face (the tax). While very well intentioned, the multifamily housing (market) is going down. The statistics show it.
Can you break down how you raise capital for your impact funds?
For most of the 24 years of SDS, I would say 90% of our capital was from banks. Many of the largest banks in the country like J.P. Morgan Chase and U.S. Bank have been investors with us since going back to 2006/2007. The challenge for us (is that) we’re a small man. We have about $1.7 billion of active assets under management.
Historically, when we look at exits, that number goes up to about $2.4 billion. And while that may sound like a big number in the scheme of private equity fund managers, when you look at Ares Management and Blackstone and Oaktree Capital Management, it’s actually minuscule.
Recently, we received our first public pension fund capital through GCM Grosvenor, which really is a big deal for an impact manager because public pension funds can only focus on returns for the pensioners. They can’t look at your social mission.
Are there any specific state or city programs SDS takes advantage of?
With our SDS Supportive Housing Fund here in California and Los Angeles, we definitely use density bonuses. We have covenants on the property committing to affordable housing and that allows you to have more units than we otherwise would be able to because we are committing to affordable housing. We can get more units, which means more rent payments and that helps make the numbers work so density bonuses are really key. The public welfare tax exemption, I think, for anyone doing affordable (or) workforce (housing) in California, is critical. And then for permanent supportive housing, you do need the federal vouchers.
How has SDS grown since its inception?
We’ve grown completely organically from cash flows. I never took on any equity investors or debt to grow the company, which, in one sense, can be painful because you need to generate the revenues before you have the wherewithal to do the next thing. But I was also a big believer in being able to chart my own path with SDS and, as soon as you take on investors or partners in that way, it creates a different dynamic of perhaps what direction they want to see the company go. I’m happy I did that, but maybe I’d be 10 times bigger had I taken on equity investors earlier.
What’s next for the company?
We’re launching our third southern fund, which will be our biggest yet. We’re very excited about that. To date, with our different funds, we have financed (nearly) 7,000 units of affordable and permanent supportive housing across the country, and the projects we have funded have helped create over 17,000 (permanent) jobs. We’re proud of these statistics and that the statistics are getting bigger and they’re going to get bigger faster because our funds are becoming larger now that we’ve got momentum and track record.
We’ve got a number of permanent supportive housing projects here in Los Angeles that we’re looking at right now so we’re enthusiastic about upcoming closings on those. It’s an interesting market. We are being cautious and looking at the potential headwinds – inflation, tariffs, interest rates – working really closely with the sponsors we’re funding to make sure that they’re on track (and) on budget, and I don’t think that’s dissimilar from many other investors in the market right now. But we are continuing to grow our funds, which I’m really happy to see.
