Private equity looks to leverage $150M fund for supportive housing for homeless

SDS Capital Group has raised a $150 million fund to finance permanent housing with supportive services for the homeless.

Most of the 1,800 units planned over 30 projects will be in Los Angeles County, with several more expected in other parts of the state.

The Los Angeles-based firm manages various “impact investment funds” – a term often used to describe efforts to address social needs while seeking a profit. It raised the money through its Supportive Housing Fund.

The fund is providing capital for RMG Housing in a bid to show that private investment can spur faster and cheaper production of supportive residential units compared with projects that rely on government financing, the typical route of affordable housing development.

The model allows RMG “to stay away from the government dollars for land and construction,” said Deborah La Franchi, SDS Capital’s CEO, clearing the way for the developer to be “nimble and efficient and just move and get these built.”

Kaiser Permanente led the round of funding at $50 million. Other backers come from the corporate and nonprofit sectors, including Ally Bank, Synchrony Bank, Hudson Pacific Properties, and the California Community Foundation, among others.

SDS capped the fund at $150 million in hopes of developing a model that will allow it to finance two phases of development, La Franchi said. The plan is to use the $150 million fund to finance 15 projects, each of which is expected to take about two years to complete. The properties would be refinanced after each is completed, providing capital for more projects.

The goal is to build 30 projects and a total of 1,800 permanent supportive housing units. Permanent supportive housing, intended for the chronically homeless, typically combines rental assistance with ongoing healthcare services for residents dealing with circumstances ranging from mental health conditions to histories of substance abuse.

A successful effort would amount to an incremental improvement in a long-vexing problem: There are currently an estimated 41,000 homeless individuals in Los Angeles, where the median home price was $915,000 in September.

In 2016 voters passed Proposition HHH, which enabled the city to support new homeless housing efforts with $1.2 billion in bonds, but those efforts have come under fire for inefficiency. A 2020 audit by Los Angeles City Controller Ron Galperin found that a majority of city-funded projects on the drawing board had stalled, with costs of the few that were getting built averaging $531,000 per unit. Galperin’s audit found that some projects cost nearly $750,000 per unit.

SDS Capital and RMG say their planned 1,800 units will cost an average of $200,000 to build. Part of the cost would be offset by reduced land acquisition costs expected to come in South L.A., where the firms plan to partner with a number churches who would lease extra land for housing developments.

The developer will also utilize modular housing on some projects, joining a trend that has led to reduced costs and shorter construction timelines. Several modular projects in Los Angeles have featured modular components fashioned after the sorts of shipping containers used by trans-oceanic importers and exporters.

“Our entire process, from the time we start underwriting to tenants moving in, is 24 months,” said La Franchi.

SDS Capital has funded six projects by RMG so far, including the Dolores Huerta apartments, which broke ground in May on Figueroa Street in South L.A. and also utilize shipping containers

RMG has also built prototypes to serve as a proof of concept for investors. One is a four-story building with a rooftop patio on East Vernon Avenue. A group of 20 recently homeless people moved into that building in February.

RMG’s projects are expected to feature units that average 500-square-feet each, with plans calling for anywhere from 40 to 100 single-bedroom units per project. SDS Capital and RMG are working with Homeless Health Care, an outreach nonprofit, to get tenants and arrange supportive services.

Homeless Health Care has a waiting list of prospective tenants who will be subsidized as renters.

“We have many clients that are sitting with a Section 8 voucher,” Mark Casanova, executive director of Homeless Health Care, an outreach nonprofit, told the Los Angeles Times earlier this year. “They’re ready to find a unit. There aren’t enough units available.”

Going forward, SDS expects to finance a new project every 60 to 90 days. “The development is quick,” La Franchi said, “the velocity is fast” and “the goal is scale.”