Affordable housing developers in the US aren’t waiting to find out which federal government-backed financing programs will be cut by the Trump administration. They’re pulling together private financing sources to secure debt faster and build cheaper to meet surging demand in the US for affordable housing.
Los Angeles-based impact real estate investor SDS Capital, through a new asset-backed lending business, is looking to originate at least $1 billion in financing over the next 18 months for the creation of 4,000 new affordable housing units, with a focus on projects in the country’s lowest-income communities.
With a shortage of more than four million homes to meet national affordable housing demand, the firm sought ways to lower costs for affordable housing developers. “All of our different funds and products have been focused on equity for these types of transactions,” SDS Capital’s Deborah La Franchi told ImpactAlpha. But higher debt costs “really puts deep strain on these affordable housing deals.”
SDS Impact Debt is targeting large development projects, from individual assets to large pools of assets, and is looking to secure $20 million or more in financing. It has designed an impact financing structure that offers developers below-market interest, higher leverage and longer amortization compared to traditional financing sources.
Innovative finance
SDS expects to roll out loans quickly and is looking at deals in Los Angeles, Texas, North Carolina and Washington State, markets where it has already invested equity in more than 8,000 units of affordable and permanent housing for the homeless (see, “SDS Capital deploys private equity to finance permanent housing for homeless Californians”). “We’re seeing an enormous amount of demand on the developer side,” said Jason Riffe, who was brought on to lead SDS Impact Debt.
SDS is selling bonds to institutional investors to finance the debt transactions. “There’s a lot of appetite there,” Riffe told ImpactAlpha. The firm is partnering with large financial institutions to reach its investors that typically invest in money-market funds, endowments, property and casualty insurance.
By purchasing debt that goes into affordable housing projects for extremely low-income individuals, Riffe says investors are driving impact as an added value. He added that SDS expects to bring in between $400 million to $500 million by August this year, with a pipeline of an additional $800 million, “not including what will come in the rest of this year.”
Going private
Launching SDS Impact Debt, says La Franchi, advances the firm’s goal of creating an integrated real estate financing entity that offers both debt and equity financing for impact-focused affordable housing projects nationwide.
SDS has always worked with housing developers using historic tax credits, HUD financing and other federal government programs. “We are in real time seeing concern about execution and what’s going to happen with those programs,” said La Franchi. “We’re all feeling a little uncertain in terms of these government financing sources.”
Regardless of market environments, she says time is money in real estate. With the ability to deploy both debt and equity, SDS can help housing developers scale more quickly to tackle the affordable housing crisis. “Instead of doing one transaction every two, three years, maybe you’re doing two, three transactions every three years,” said La Franchi. “We’re looking to help our sponsors amplify their impact in the marketplace by being a programmatic financial partner for them.”
SDS has $1.7 billion in assets under management across five impact funds and co-investments
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