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April 10, 2024

Real Estate Capital USA Highlights ASREF II Close with GCM Grosvenor

RE Capital USA interviewed American South Fund Management Managing Director Deborah La Franchi on ASREF II

LA manager ASFM secures GCM Grosvenor commitment for pref equity, mezz platform
By SHIHAO FENG, RE Capital USA, Published March 13, 2024  

American South Fund Management, a Los Angeles-based manager that provides preferred equity, mezzanine debt and equity for affordable and workforce housing, last month secured a $50 million commitment from Chicago-based GCM Grosvenor that will allow it to expand its financing platform.

The company, a joint venture between SDS Capital Group and Vintage Realty, lined up the commitment as part of its second fund. ASFM closed the fund with $174 million in equity commitments recently, with Deborah La Franchi, managing partner and principal, noting that GSM Grosvenor represents the firm’s first major institutional allocation.

The fund, American South Real Estate Fund II, will focus on the firm’s longtime mission of impact investing in sectors including affordable and workforce housing. 

“We really look at how we can use private sector capital to achieve some of these social impact goals, and deliver a risk-adjusted, market-rate return for our investors,” La Franchi said.

Directing impact 

American South Fund Management provides mezzanine debt, preferred equity, and equity financing for real estate sponsors with projects located across 10 Southern states through its two funds, with the vehicles prioritizing impact investment in low- and moderate-income communities. 

So far, 81 percent of the units funded by ASFM are made affordable to families at less than 80 percent of the area median income, according to the firm. 

In the mid-market where ASFM and its funds operate, there is usually a lack of capital sources for real estate developers whose transactions may be too small to attract institutional investment, La Franchi said. 

ASFM aims to fill these voids by providing mezzanine debt or preferred equity as bridge financing along with construction loans issued by bank lenders. The company also focuses on financing affordable housing projects, given the bigger shortage of financing in this field, La Franchi noted. 

“We are typically funding housing that’s affordable to families that are 80 percent of the area median income or less because we see there’s a tremendous demand for that product and very little supply,” she said.

La Franchi added as the affordability issue is becoming broader at the national level, the demand for affordable housing persists. As a result, American South Fund Management has been able to work with smaller sponsors on such projects efficiently and helped the sponsors to grow over time. 

She cited the investment ASFM made to Elizabeth Property Group, a Dallas-based, woman-owned affordable housing owner. In July 2023, Elizabeth Property Group joined forces with funds associated with ASFM and acquired 1,444 affordable housing units in a six-property portfolio in Texas, the biggest move the company has ever made. 

“[The] fund helps these great sponsors who are building affordable housing become bigger and bigger,” La Franchi noted. She said this is another layer of the impact ASFM aims at other than funding affordable housing developments directly in distressed neighborhoods.

Still, the premier consideration of ASFM’s thesis is whether the investment can achieve targeted returns relative to risk for its investors, La Franchi noted. 

“No matter how great the impact is, that doesn’t mean we will fund something that doesn’t have the financial fundamentals in place,” she said.

Financial Fundamentals

On the project level, to achieve the targeted risk-adjusted return, La Franchi said ASFM will closely examine the sponsors’ track records on similar types of projects and whether the execution team is lined up for that development. 

“Right now, a lot of developers have deals that are struggling because of the interest rate environment, so we need to also underwrite what the rest of their portfolio is doing,” she noted. 

Beyond the sponsorship, the firm will also examine the demand dynamics in the specific marketplace, analyzing if any market trends could impact the project’s fundamentals. For instance, in a market where a big manufacturing plant is planned to be built, there could be increasing demand for workforce housing and affordable housing in the near term, La Franchi explained.

On the fundraising side, La Franchi said it’s still challenging to raise impact funds due to the misperception that impact investing is concessionary below the market. 

“Prospective investors may be skeptical about [whether] an impact fund can execute on the financial side, so we feel even more pressure to prove that we can perform at a market level,” she said. 

American South Fund Management received its first public pension fund capital from GCM Grosvenor, which was considered a breakthrough for this emerging investment manager. 

“Just as it’s hard for women and minority developers to get capital from funds, it’s hard for funds like ours that are small, and emerging, to secure capital from the big institutions like public pensions,” La Franchi said.

About a third of ASFM projects have a public-private partnership angle, where the projects may utilize capital at the city, state, or federal levels through facilities like tax credits. Still, the majority of the fund’s projects are in line with common market standards. 

“We’re funding alongside a construction loan with the developer, helping them to bridge the gap. If the developer can’t come up with 35 percent of the equity, we’re able to provide a substantial portion of that, and then they [can] just refinance us out once the tenants have moved in and rents have stabilized,” she added.

When the fund exits a transaction, the sponsors usually refinance the investment with a permanent loan from bank lenders. “There’s no special vehicle that takes us out. We’re underwriting to commercial market-rate standards, [and] that has to be how we can get out of the deal,” La Franchi added.

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