How SDS Capital Group CEO Deborah La Franchi Finances Affordable Housing Projects

Deborah La Franchi has devoted her life to economic development and affordable housing. As the founder and CEO of SDS Capital Group, a Los Angeles-based investment firm with $1.7 billion assets under management, La Franchi manages six different “impact funds” and product strategies that aim to channel private-sector dollars into affordable housing development. 

Each impact fund targets different geographies and uses different investment theses. For instance, in January, she launched SDS Impact Debt (SDSID), a debt capital platform that will issue corporate bonds to institutional investors and use the proceeds to invest more than $1 billion to build and renovate affordable housing nationwide over the next 18 months. 

La Franchi sat down with Commercial Observer to discuss her career, the lessons she learned working for L.A. city government in the 1990s, and why it’s so hard to build housing in America. 

This conversation has been edited for length and clarity.

How did you get involved in commercial real estate?

Deborah La Franchi: My background is that I started working for the City of Los Angeles after graduate school in 1995. I wanted to go into economic development and was focused on poverty, and had finished my master’s in public policy at Georgetown, having done my thesis on the Watts Enterprise Zone and whether that brought jobs and economic opportunity to the inner city. I started working for the mayor of Los Angeles, Richard Riordan, and over the next few years, I became assistant deputy mayor for economic development. 

L.A. was in a tough spot in the 1990s, and it was really about bringing jobs back to L.A. because we had had a lot of gang problems, the crack epidemic was really hitting the city hard, and companies were leaving, jobs were leaving. So we really focused on: How do we keep the companies here? How do we help them grow? My entry into commercial real estate really was through an economic development lens within the public sector, answering questions like: How do we bring jobs back to the urban core? How do we build the capital stack of public private partnership money to make it happen? 

And how did this coincide with real estate private equity?

We realized the city had no money in the early 1990s, so we decided to create some of the first impact funds in the country. We called them the double bottom line: Do good, do well; make money, make a difference. And I sort of raised my hand when my boss, who was the deputy mayor, said, “I need someone to spearhead launching one of these funds in Los Angeles.” At the time, I didn’t even know what private equity was, but I raised my hand and spent the next 18 months launching the Genesis L.A. Real Estate Fund, where we raised private sector money to invest in our inner city. And we had Shamrock Capital, the Roy Disney family office, manage that fund, but that was sort of baptism by fire for me at age 27. Then ultimately, I started my firm in 2001 to do that across the country. 

What were the main lessons you took away from your time in Los Angeles government, about affordable housing and about economic development?

I had thought I was going to spend my career in government focused on poverty. My mindset was: If you want to impact poverty, you either are going to work at a nonprofit or in government. After we did the first Genesis L.A. commercial real estate fund, I started seeing how private sector capital, how private equity was investing in our poorest communities of Los Angeles and creating jobs, and ultimately housing. So I was really learning each time I helped launch one of these funds, I’d have a big aha moment, like, “Oh, wow. It’s not just government money and nonprofit money that’s needed to create jobs in very high-poverty communities. If we can tap the private separate capital in the battle against poverty, then the arsenal is much bigger.” And that was really the founding concept or mission behind SDS Capital Group when I launched it in 2001. 

What was the mission?

It was to very specifically and intentionally engage the private sector in the battle against poverty, and the way I wanted to do this was by creating a platform of impact funds. Each fund would have a different geography, a different investment strategy, but all of them would focus on investing in distressed communities or investing in projects that either were hiring people in low-income communities or with barriers to employment, such as veterans or people that have been in or out of the justice system, or from affordable housing or homeless housing. So I completely pivoted out of government. 

How did you receive that initial capital to begin making your investments?

So when I left the mayor’s office — after launching the Genesis Real Estate Fund, which was $85 million, and then we launched the Genesis Workforce Housing Fund, which was $102 million — I went over to the Genesis L.A. nonprofit that we had spun out of the city, and really got that off the ground for a few years, and I realized that I really wanted my own company, to create my own destiny rather than being in a nonprofit. I wanted to be national. So I started the firm, and I think sometimes it’s great that entrepreneurs don’t know what they don’t know, and it gives them eternal hope and optimism — that if they actually knew what they didn’t know, they might not have started the company. I didn’t fully realize that for me to launch a fund that the reason we were successful with the first two Genesis funds is, with the first one, the Disney family office was the manager. You had Roy Disney’s family office, investing globally with the Disney money, as a fund manager, and they had a tremendous track record. And then the Genesis Workforce Housing Fund had a different manager that had been doing low-income housing, tax credit syndications for a long time. 

So I started SDS Capital, and I wanted to launch these types of funds, but I had no assets under management. I had no track record. So I had to take consulting jobs to keep the lights on and help launch funds in areas. I had to figure out how I get AUM. How do I do this? And the way I did it is I did a lot of joint ventures for 15 years. I would go out and find another group that had the track record and say, ”Hey, Michigan really needs one of these. You’ve got this great track record. I know how to structure and build the funds. Let’s work together.” And I would be a JV partner in the different funds. So for 15 years, that’s how I built a track record, through joint ventures.

So did the Joint ventures complement your fundraising, or did the fundraising come after you established yourself through joint ventures?

The way I typically worked is I would identify an opportunity in a market, and then I’d go find the right partner. And I might not have known those partners. For instance, when I first started SDS, my partner, Elden Daniels, determined that Michigan really needed an impact fund before the GFC. The Great Lakes was really kind of losing businesses, and so we targeted the Great Lakes as a region. We found the Great Lakes Capital Fund. They did low-income housing. We were introduced to them, and we pitched it to them and said, “You’re on the ground here. You do tax credit deals. We want to help you build a private equity vehicle that’s impactful,” and we got to know them, and we did a JV. So I’d spot the opportunity, then I’d find the right partner for that joint venture, and then we’d build it, launch it, and capitalize it together and manage it together. 

What’s the biggest misunderstanding in the market about affordable housing? 

Actually there was an article just published in Pension & Investments this week that I wrote, an op-ed on “Why Affordable Housing, Why Now?” and how institutional investors are looking at it very differently than they did in the past. One of the earlier mindsets was that affordable housing belongs in the realm of nonprofits, foundations and government. And that’s largely where it has been for a few decades. But now with a shortage of 7 million units across the country, a number of managers, like us, who have over a decade of track records that can be evaluated and the returns — along with studies that show low vacancy rates and strong NOI — institutional money is actually looking at affordable housing. So that’s a big, a big change. 

What about on the development side?

On the development side, I think one of the big changes we’re seeing is that federal money really has become quite difficult and slow to work with. The crisis of 7 million missing units of affordable housing is getting worse, not better. And there certainly is a growing number of sponsors and developers of affordable housing that are stepping back and saying, “Hey, are there different ways for us to look at this? Are there different sources of capital that are perhaps more nimble, more efficient, and can come into my project faster than really using the kind of acronym soup of government dollars?” You know, you see a lot of developers that are using seven to 12 funding sources that are all government sources. That’s a very slow process that takes years and years and years, versus using impact funds and these different bond products as our capital stack and really reducing the number of public sector sources. Now they can go into the deals that can be more scalable, with faster velocity, higher volume. So I think that that’s something we’re seeing more of, especially as the cost per unit has been going up so much, because of the time it takes to secure all these funding sources.

In a country with so much money, so much wealth, such a vibrant capital markets system, why is affordable housing so hard to come by in America? 

Well, I mean, this is a three-hour answer. But if we just focus on urban areas, and here I sit in California, where the regulatory environment has increased the cost of housing and the ability to develop new housing. It has just become so much more constrained. NIMBYism, the challenges, the bureaucratic time frame to get through the process in larger urban areas, it’s been getting harder and harder, not easier and easier. My career started in economic development because I always felt, if you can create the jobs, then people have the right paycheck to pay for their housing. If you give them a quality paycheck, they can find quality housing. Ironically, I’ve really moved more into the housing space over the past 10 years because that’s not always the case. If the housing isn’t there, just having the right paycheck may not be the answer, because if the housing is not being built, those people are still spending too much of their family’s income on their housing costs. Of course, the last five years, we’ve had high inflation, high interest rates, all that has driven so many real estate developers into higher-income housing, that you’re just really seeing a big divergence. 

But could affordable housing economics be amended at either a federal level or even a state level to incentivize development?

Yeah, I feel the missing piece is very simple incentives. The tax credit process takes nine months to a year. It’s very competitive. You have to apply, you have to wait, so you can’t move forward with your project during this period that you’re waiting. We do a lot of investing in the South, and the local government, counties and the states in the South have been super proactive in creating incentives that are easy to access, tied to the number of affordable units, where you put a covenant on them, and they’re easy to access, and you don’t have to wait a year to determine if you are awarded something. There’s not a big bureaucracy built around the application, the closing of the deals, and there isn’t a lot of fees involved. 

So I personally think there should be, at the local, state and federal level, just better tax incentives that are easy to put on your tax forms, so I don’t have to hire a bunch of lawyers and tax accountants. Unfortunately, a lot of the incentive system is built around programs that have a lot of extra costs to them at the project level. 

What’s the best advice you’ve received in your commercial real estate career? 

You know, Mayor Riordan was really big on two things when we worked in the city. One was, “Don’t ask permission, ask forgiveness.” If you see something that’s needed, don’t go around second-guessing yourself and allow naysayers to convince you it can’t be done. Go make it happen. And I really took that to heart when starting SDS, certainly. The other advice, which didn’t come from him, was just surround yourself with great people. If you surround yourself with great people, what you’ll be able to achieve will be amplified. And my team at SDS is just amazing. And that’s what drives our ability to be creative and innovative and launch new products. 

Brian Pascus can be reached at bpascus@commercialobserver.com.