Asset-backed bond financing has long been used to fund everything from cars to data centers. So why not affordable housing, where the need is greatest?
Los Angeles-based impact fund manager SDS Capital Group has launched a new capital platform—SDS Impact Debt (SDSID)—that aims to bring much needed, low-cost debt to the affordable housing market. It is an asset-backed model that offers below-market financing (both permanent and construction) for affordable housing projects—and is potentially scalable across the U.S.
Besides working with developers to raise capital for new projects, SDSID also offers debt to restructure existing capital stacks or to refinance stabilized assets. Through the platform, the company expects to finance more than $1 billion in new housing units over the next 18 months, with an even bigger “curve” of growth ahead.
Urban Land recently talked with SDS Capital Group founder and CEO Deborah La Franchi and Jason Riffe, managing director of SDSID, to learn more about its debt financing model.
Urban Land: Can you provide a brief overview of SDS Capital Group and your track record in impact investing?
Deborah La Franchi: I started SDS Capital Group in 2001 with the vision of creating a platform of different types of impact funds involved in different geographies and different strategies across the United States, and the primary mission was to engage the private sector in the battle against poverty by creating these financial funds or tools. We’re at approximately $1.7 billion of assets under management today. This is our sixth distinctive strategy on our platform. SDSID is just an expansion of the original vision of bringing more private sector—faster, more nimble capital—to affordable housing developers.
UL: What’s the backstory on this new SDS Impact Debt platform? Was there a particular catalyst?
La Franchi: Most of our funds have been private equity in the past, focusing on the equity in the capital stack. Jason will expand on it, but we both see that there’s a need for cheaper, faster capital—more efficient capital—on the debt side of the equation as well. And to tackle the national shortage of affordable housing, we want to have more tools in the toolbox to help the velocity of these types of projects get financed.
Jason Riffe: Four years ago, I was hired by United Way to figure out how to increase their impact using debt and/or equity. There are 1,100 United Ways around the world, and they’ve always given grants. They’ve never used debt or equity, but they asked me to build a team in L.A. and come up with a solution. My motivation was how can we control the cost of construction of affordable housing and build this stuff quicker and cheaper?
I tested two debt funds at United Way. The first one combined a number of sources from philanthropy, and I had a $25 million bond in that first fund that closed at around $67 million with a $50 million goal. Then I said, “Let’s do fund two and go for $100 million.” I realized that bond execution and asset-backed capital markets execution helped me raise the full senior debt quicker and cheaper than I could in any other way. The second fund was supported by PNC with a letter of credit. It was rated by Moody’s at AA and the second fund closed to finance four projects at about $112 million.
That was the creation of the platform and the product. So I said to Deb, “We tested this model for three years. Let’s partner and see how we can scale.” Over the past year we’ve engaged six deals. We started engaging clients on this platform in March of last year, and those first six deals will start to access their bond capital in June and July of this year.
La Franchi: What we’re really trying to do is minimize the number of capital sources an affordable housing developer needs to chase, usually over multiple years. Time is money. Time is returns. By way of example, the typical affordable housing project in the L.A. market has anywhere from five to 12 funding sources, and it can take five to seven years to pull that capital stack together. The cost escalates over that time frame, because you’re paying on the debt that you use to acquire the property and such.
One of the biggest time savers in this model is not having to cobble together all these different nonprofit and local, state, and federal government concessionary funding programs, which take not only immense time but a lot of staff and employees. So we can now offer equity and debt and provide a more simplified solution for sponsors.
UL: According to your website, your terms will range from three to 40 years, with debt that is priced at 150 to 250 bps below current retail debt offerings, with an LTV up to 90 percent. How are you able to achieve below-market pricing—is it the bonds?
Riffe: Yes, it’s really because we’re going direct to the bond market. The hunt I’ve always been on is to find the cheapest cost of capital and give that to the developer for impact. So we’re accessing a market that our competitors might also access, but we’re charging a lower fee, and we’re not putting a spread on the interest rate.
UL: Is it oversimplifying to say the key is the bond market financing?
Riffe: No, it is the asset-backed bond execution. I tell everyone this isn’t something that we invented. It’s existed for years. It takes a lot of work, and there are a lot of levers you have to pull together to make it work correctly. But that is the product.
UL: Do you have a particular target market?
Riffe: The minimum transaction size we look at is $20 million. Anything below that [and] the costs aren’t beneficial to the developer. Both Deb and I are motivated to use capital markets to end poverty. She started with the equity side, and I come at it from the debt side. We’re really looking to work with developers who have that as a priority. If that’s their focus, and they’re willing to house the population that needs to be housed, or restrict some percentage of units for affordability, then we have a solution for them.
UL: What states or geographic markets are you focusing on?
Riffe: Our first six deals are all in the county of L.A. In our pipeline, we’re now looking at Texas, North Carolina, and Washington state, but we are able to deploy the debt in any state.
UL: Can you share an example of a deal you’re currently working on?
Riffe: What excites me about this execution is that every deal is bespoke to the needs of the client. Because we are going straight to the investors, whatever the project needs, we try and package and make that pitch and get the debt for that project. We mainly focus on construction [loans], bridge [loans], and permanent [loans]. On one project in downtown L.A., the developer had a variable rate loan for construction, and they’re probably 65 percent into their build [of 227 units]. They had passed their prepayment penalty phase of their current senior debt, and it was a 12 percent loan when they came to me.
We came in and did an execution to refi that loan and cut their cost of capital from 12 percent to 5.9 percent [with a $35 million loan]. They increased their covenant on their building, not just because of my capital, but then we introduced them to other sources. So it’s now a 100 percent affordable building, and that debt will stay in the building for three years, with two one-year extension options. They finished the construction in January 2024; they master-leased the building to a local agency for affordable housing; they stabilized it; and they’re able to maintain that fixed rate through the end of the bond term.
UL: How are you defining affordable housing, and do you have certain thresholds that a project has to hit to qualify?
Riffe: Broadly with SDSID, I work at the zero to 120 percent of AMI [area median income] supportable. It’s a large spectrum, but that covers everything from supportive housing, which would be a master lease project to 80 percent AMI to workforce housing. I don’t determine what their covenant is. Sometimes, the bond will drive that. If you need safe harbor carve-outs, you need 25 percent at 50 AMI, 75 percent below 80 AMI. The bond will drive that if they access a certain type of bond. At minimum, I won’t take anything that’s less than 25 percent at 80 percent AMI or below. But it’s more the mission we want to achieve. If we’re going to give you below market capital, we want to make sure you’re housing the populations that need to be housed.
UL: Is this model unique in the industry, and do you think the industry would benefit from other firms duplicating it?
La Franchi: It’s innovative in that we’re drilling down into the affordable housing category for this capital, and we’re seeking to scale it. As Jason said, there’s nothing unique about using bonds for financing. Our goal is to scale it, and that’s why we partnered and are launching the SDSID platform. The country needs all sorts of new and innovative funding sources to tackle a five-to-seven million-unit shortage of affordable housing, with sources at the local level, state level, federal level, and private capital. All cylinders need to be firing to address this growing shortage across the country. This is one more important tool in the toolbox to tackle this problem.
Riffe: It’s definitely replicable. There would need to be a significant educational campaign from the financial institutions for developers to even know this exists. The concerns inside of banking are related to compliance and how they look at bonds versus direct loans and balance sheets and things like that. But if they are willing to educate the market, then the market could access this capital. Asset-backed financing through bonds is not new. Buyers buy asset-backed car loans or data centers that are pooled together. Any cash flowing asset can be bonded and is sold across the market.
We would love to see more people in the space. More than anything, it involves sweat equity and education. It’s selling a product. It’s very relationship-driven, and we work very closely with our clients to make sure they understand—if they need a derivative, a swap, or how we can work on amortization up to 40 years. There’s a number of elements of a bond that the clients we’re working with need to understand, and I think that’s the barrier. It’s the sweat equity, and it’s the education.
