Westwood-based SDS Capital Group has closed on a $150.8 million fund as part of the company’s larger efforts to invest in distressed communities around the country.
The latest fund will be used for permanent supportive housing projects in California developed by Hermosa Beach-based RMG Housing.

Company Founder Deborah La Franchi anticipates as much as $110 million of the initial fund being invested in L.A. County, which could mean more than $220 million in investment as it is a revolving fund in which proceeds will be used to then fund more projects. The initial fund will be used for roughly 30 projects in total, 22 of which will be in L.A. County.

The fund’s biggest investors include Oakland-based Kaiser Permanente and Sandy, Utah-based Ally Bank, which invested $50 million and $20 million, respectively. Both companies are big players in L.A. and have invested in the community.

Jan Bergeson, Ally Bank’s executive director and Community Reinvestment Act officer, said SDS had a similar mission to the bank to “help improve economic mobility in underserved communities and helping the homeless.”

“It was one of the first funds we had seen in the country that was going to be completely focused on permanent supportive housing for people that are homeless, she said. “Most projects will have a percentage (of units for low-income individuals) … but with SDS, it was going to be the entire project, which is something we hadn’t seen before and I thought was really innovative.”

She added that Ally Bank was interested in investing with SDS again and thinks similar models could be adopted widely across the country to help homeless individuals by showing how “feasible and sustainable” funds like SDS’ can be.

Other investors include downtown-based Weingart Foundation.
 
Miguel Santana, the Weingart Foundation’s president and chief executive, has a long history with supportive housing projects. He previously served as the city administrative officer for L.A. In that role, he oversaw dispersal of funds approved by Proposition HHH, a $1.2 billion bond for supportive housing projects.

“The existing model (for funding supportive housing projects) isn’t sustainable or effective,” he said. “What SDS has introduced is this idea that the private sector can be in the business of building housing for people experiencing homelessness, and it can be done for a profit, and it can be done faster and cheaper than what the traditional model looks like.”

Santana added that there are very few other for-profit companies doing similar things. Instead, most affordable and supportive housing is built and managed by nonprofits. The SDS model, he said, could get more money invested in projects faster and help build more units.

Deeper pockets

La Franchi, who founded SDS in 2001 and serves as its chief executive, got her start in the sector serving as an assistant deputy mayor of economic development for Mayor Richard Riordan.
She described her focus as “eliminating poverty.”

“There were so many challenges in Los Angeles at that time. The mid-’90s were really tough in L.A.,” she said.

La Franchi said she was specifically focused on “engaging the private sector more on our fight against poverty” and launched a fund to invest in low-income and distressed communities.
They tapped Shamrock, Roy Disney’s family office company, to manage the fund, as La Franchi wanted to get it “out of government.”

“Government is not equipped to evaluate these types of investments. It will be bogged down and get political,” she said.

She went on to be the chief executive of Genesis LA Economic Growth Corp., overseeing a workforce housing fund before launching SDS. While Genesis focuses on L.A., SDS does work nationwide.
 
“This big lightbulb really went on for me,” she said. “I really want to focus, instead of on the government money, on how we engage the private sector in the battle against poverty. There’s not enough government subsidies or nonprofit subsidies to fix poverty in our country,” she said.

According to La Franchi, banks might provide 60% of the capital a developer needs for a project. The developer then has to come up with the rest, and often “they just don’t have it,” she said.
La Franchi said SDS can put up 93% to 97% of the funds needed for a project. That includes costs ranging from land to construction.
 
Each fund SDS does has a different investment strategy. For example, one of the company’s funds was focused on Michigan and one on the South.

And despite the company’s current success — it now has $1.3 billion of assets under management — according to La Franchi, it was a hard start.

“It’s really difficult to raise a fund if you don’t already run a fund,” she said.

To overcome that hurdle, SDS engaged in joint ventures with partners that already managed money.
Its first fund was a joint venture providing money to the New Orleans area after Hurricane Katrina hit. The fund eventually grew to $641 million.
 
“That became the anchor for me to be able to show investors, ‘Hey, look what we’re doing,’” La Franchi said.

Its next fund, which is unwinding now, was also a joint venture in which SDS was a 20% partner.
 
The company’s new fund will be used to create permanent supportive housing units locally. 

Six projects have already been funded, and an additional project will be funded every 60 to 90 days. Five of the six are in L.A. County.

Ability to scale

La Franchi said that the average cost of building a supportive unit in L.A. County is $500,000 to $1 million a unit, most of which comes from taxpayer subsidies. These projects can have up to a dozen different funding sources, which can take months if not years to line up. SDS, meanwhile, can provide a large percentage of the capital on its own.

“I have been frustrated that the existing model for how affordable housing is built is one that can’t be built to the scale that is necessary to appropriately respond to the housing and homeless crisis that Los Angeles is facing,” the Weingart Foundation’s Santana said. “The traditional model relies heavily on subsidies for construction, and those subsidies are complicated and come from multiple sources … and often contribute to the delay in time in building affordable units and the cost.”

He added that when a project has all of its funding coming from one place, the construction timeline can be cut in half, which also helps reduce overall costs.

Tim Roth, chief executive of RMG Housing, said his company can develop units for a much cheaper price of roughly $200,000 a unit.

The units are cheaper because using private capital speeds up the timeline and eliminates some of the attorney and banking fees, carry costs, and other fees and requirements associated with public funding sources.

“We started into this model about six years back, and it had to do with doing things more privately,” Roth said. “Both me and (Mo Zahrawi, chief financial and operating officer at RMG Housing) were looking for a capital partner that would be more strategic for us and fill the needs and have the ease of capital and committed funding necessary.”

SDS’ fund will only go to RMG Housing projects because, La Franchi said, their approach to developing cost-effective units helps encourage more investor interest.
 
“It’s been great having them as a partner,” Zahrawi said. “It’s great that we’re not out chasing dollars for every project and are able to scale this.”

Roth agreed, adding that the SDS funds would make the company “a lot more efficient.”

La Franchi said projects with RMG take roughly two years to complete, whereas other projects can take five to seven years on average to complete, largely because of the decreased time needed to finance the units.

RMG is also looking at modular units, which could further speed up project delivery dates. Zahrawi said a lot of lenders are not open to modular projects since the building process is relatively new; SDS is willing to fund these projects.

With the SDS fund, Roth is hoping to deliver 1,800 to 2,000 supportive housing units in the next six years. According to California Housing Partnership Corp., 509,000 affordable units are needed.

“For us, it’s a huge opportunity, and we couldn’t do it without that type of money placement that SDS is doing,” Roth said.