To End Homelessness, the Energy of Money Must Change

A homeless encampment on a street in downtown Los Angeles. (Photo by iStock/MattGush)

Los Angeles’ Grand Avenue is home to an incredible display of the city’s capacity to build. On one side of the street stand two new gleaming towers replete with multi-million-dollar “residences,” a luxury hotel, trendy restaurants, and high-end shops. The architect, Frank Gehry. The cost, $1 billion.

Across the street is Gehry’s signature $274 million Walt Disney Concert Hall.

A couple hundred yards southwest is the Colburn School of Music, currently planning a $350 million expansion, also led by Gehry. The jewel of the campus is Zipper Hall, a 430-seat mini-Disney.

I am sitting in Zipper’s first row. Onstage, four mayoral candidates take turns fielding questions about the race’s number one issue, homelessness. To my left sits a tall woman with glasses who, like the candidates and moderators, is not wearing a mask, despite clear instructions by the host to do so. To underline her apparent status, she disappears through a side door to reappear on the stage.

Her name is Ruby Smith. After spending years on the street, Smith says, she was offered a permanent home by local service provider Los Angeles Family Housing.

She reaches out her hand as if holding a key and says:

“The moment I put that key in the door I felt a whole new sense of freeness and newness. We need affordable housing. We don’t know what impact it will have for peoples’ lives to have a key in their hand.”

A mile away extends L.A.’s skid row, thousands of unhoused people crowded in tents along the sidewalks.

Such stark inequality is most pronounced in America’s wealthiest communities. Just compare San Francisco to Baltimore. The City by The Bay’s median household income is twice that of Baltimore, and yet homelessness there is twice as prevalent. 

The reason, researchers Gregg Colburn and Clayton Page Aldern argue in their new book “Homelessness is a Housing Problem,” is as simple as the title. Wealthy cities are not havens for the unhoused because of milder climates or lax policing. Rather, poor people living in places like New York, San Francisco, Seattle, and Los Angeles are pushed onto the street by inflated rents and constrained housing. A recent estimate found that corporate entities own 43 percent of all multi-family rental units in L.A.

The obvious solution is to create more housing on a massive scale. Given that private capital is a prime culprit in grinding our neighbors out into the terrors of the street, private capital must and can be mobilized towards restitution.

Key to that mobilization will be government dramatically rethinking how it funds the creation of affordable and homeless housing. Municipal, state, and federal funding streams must move from the supply side of housing to the demand. That is to provide permanent rent, buy privately developed property outright, or drive down the cost of capital by offering cheap loans and guarantees.

All these strategies create “capital stacks,” layered financing of real estate investments,  that can make housing the extremely poor and unsheltered favorable enough to unlock the vast sums tied up in the private market. 

While some, including myself, will blanche at creating financial instruments that benefit the wealthy to help the poor, the fates of millions of Americans require immediate action.

The Cost

The Department of Housing and Urban Development estimated that there were more than 580,000 people experiencing homelessness across the United States on the eve of the pandemic in 2020.

The cost to house every single person in interim and permanent housing—ranging from dorms to studios—at $200,000 a door is $116 billion, according to my back-of-the-napkin math. Remember, Elon Musk spent more than a third of that buying Twitter.

In Los Angeles County, where I live, the last count found 66,436 unhoused people living on the streets, in vehicles, or in “makeshift dwellings.” Using the same calculus, it would cost $13.3 billion to give them all safe housing.

What I am proposing may sound expensive, audacious, and impossible, but it is none of those things. While I will concede complexity, creating a financial ecosystem that draws in private capital is achievable and starts with the cash-stocked endowments of America’s charitable foundations.

Show Me the Money

As I argued in a recent Chronicle of Philanthropy op-ed, the investment portfolios of US charitable foundations are the most logical first tranche of private capital to target. Not only were these institutions incorporated for the public benefit, but they also hold at least $1 trillion in assets.

Despite philanthropy’s moral imperative, federal law only compels foundations to distribute 5 percent of their endowments per year in charitable giving. The remainder is largely invested in private markets with more of an eye to perpetuity and returns than the alleviation of human suffering.

That is changing with a growing, yet still small, cohort of charitable foundations moving their endowments to Mission Related Investing. Just 18 percent of small to midsize foundations surveyed by Exponent Philanthropy engaged in impact- or mission-aligned investing in 2021. Notable among the big boys is the Ford Foundation, which pledged $1 billion of its now $16 billion corpus to mission investing in 2017.

“Every year we use the other 95 percent of our assets to make money so we can continue doing this forever,” Ford President Darren Walker said in a 2020 Harvard Business School case study. “But what if we could put that 95 precent to use supporting the same concepts and causes the 5 percent goes toward?” 

Here’s one idea: If one-tenth of US charitable foundation wealth ($100 billion) was invested in housing, we could move 500,000 people, 86 percent of this nation’s unhoused population, off the street.

The strength of focusing on the foundations first is that while they seek risk-adjusted returns, their revenue targets tend to be lower than that of private equity. By signaling their dedication to impact with cold-hard-cash, they can provide a pathway for risk-averse fund managers to draw in the bigger money. The estimated assets of pension funds, which are regularly invested in real estate—sometimes in affordable/homeless housing—stood at more than $35 trillion in 2020.

Valerie Red-Horse Mohl serves as the East Bay Community Foundation’s chief financial officer, where she is transitioning the foundation’s $1 billion endowment exclusively towards impact. 

“It's going to be an effort that takes all of us: philanthropy, government, and Wall Street,” she says. “We all have to really work hard on this radical surgery, and we can't be afraid of the surgery, or we'll just keep putting Band-Aids on.”

Rental Subsidies

Now to the government’s role in setting a capital stack that creates the risk-adjusted returns that all private investors seek. Part of that equation is ensuring that, if a real estate development goes to the expense of building units, there will be renters.  

Late last year, L.A.-based impact investing firm SDS Capital Group closed its $150 million Supportive Housing Fund, which will build 1,800 units statewide, with 1,200 in Los Angeles. The investors were all private, including three major local charitable foundations. SDS anticipates getting all that housing built in the next five years.

By keeping costs to $200,000 a door, SDS generates acceptable returns for its investors by relying entirely on Section 8 rental vouchers. Those subsidies are virtually recession-proof, serving as a government-backed revenue stream that helps mitigate risk.

The problem in Los Angeles and across the country is that there is a dearth of vouchers to cover the millions of Americans who are eligible but left out of the program.

In January 2021, Community Change, a national nonprofit, released its “New Deal for Housing Justice: A Housing Playbook for the New Administration.” Principal among its recommendations is making the Housing Choice Voucher Program Section 8 universal. The starting point being the passage of the Family Stability and Opportunity Vouchers Act, which was introduced in the Senate in 2021. While the bill hasn’t made it to the floor for a vote, it would fund 500,000 new vouchers.

Such a public investment would attract other fund managers and private investors looking for the risk-adjusted returns that SDS homed in on.

Further, such a federal investment could be augmented by local funds and energy. In 2014, Los Angeles County’s Health Services Agency launched something called the Flexible Housing Subsidy Pool. It started in 2015 as a mix of $4 million in philanthropic capital from the Conrad N. Hilton Foundation and $14 million more from county agencies.

“Hilton legitimized what was an idea that would have been caught up much longer in County bureaucracy,” says Mark Ghaly, a key architect of the flex pool who now serves as Secretary of California’s Health and Human Services Agency. “Having the philanthropic support at such a significant dollar amount really kickstarted that.” 

The pool offers developers and property owners rental subsidies on top of Section 8, placement of renters and other incentives, making deals viable. For Ghaly, the biggest success was using the promise of project-based vouchers, which guarantee subsidy-carrying renters to a given building. Because of the promise of uninterrupted rents, developers could secure financing and get projects off the ground, all while making acceptable returns.

By the end of 2021 the flex pool had housed 9,259 people experiencing homelessness at a pace of 127 a month.

Government as Housing Buyer

Historically, government has taken on the role of builder, creating a patchwork of grant programs that come with innumerable strings delaying construction and driving up cost.

L.A.’s Proposition HHH is case and point. The $1.2 billion bond measure that voters approved in 2016 promised to support the construction of 10,000 new homeless housing units. Six years later and only 1,142 units are ready for occupancy, and the average per-unit cost has soared to nearly $600,000, according to a 2022 report by the city’s controller.

But driven by a crisis, the state of California moved into the role of buyer with important results.

In the dark days of the pandemic, the state launched something called Project Roomkey, which paid nightly costs for the unhoused to stay in hotels and motels. The governor’s administration quickly realized it could do better by buying motels outright and deeding them over to nonprofits to provide temporary and permanent supportive housing. That new program was called Project Homekey. 

Kathleen Kelly Janus, the governor’s senior social innovation advisor, secured $46 million in pledges from key charitable foundations to reassure the legislature that Homekey’s $800 million investment would be coupled with support services for unhoused beneficiaries. This was philanthropy’s way of ensuring that the state’s investment would be met with the support the providers needed to provide the services their clients needed. The program snatched up 5,900 units in less than a year.

“Philanthropy, like any investor, loves a good return on investment,” Janus says. “What I have learned from public-private partnership is that if you can present philanthropy with an opportunity where they can leverage our public state funding, it is very attractive.”

Leverage can go both ways. The governor’s proposed budget for this fiscal year and the following calls for an additional $2.75 billion to acquire more properties, creating clear opportunities for investors who build new homeless housing to earn acceptable returns with a buyer on the backend.

Cheap Money

In 2015 the California Community Foundation illustrated, on a small scale, the power of a loan guarantee to drive investment in housing the unsheltered. It put up a $5 million guarantee to its Donor Advised Fund holders and asked them to make three-to-five-year low-interest loans, which the foundation then invested in the Corporation for Supportive Housing’s Supportive Housing Loan Fund to finance the earliest stages of permanent supportive housing development.    

The “seed investment totaling $5.77 million from our donors” was used “to secure suitable sites for development of housing for the homeless and insecure population in Los Angeles,” says the foundation’s Communications Director Paula Valle. “This resulted in the production of 42 housing projects resulting in 3,077 households getting off the street and into supportive and affordable housing units.” 

In grander fashion, the federal government has also used its balance sheet to support large-scale projects. The Transportation Infrastructure Finance and Innovation Act of 1998 provided loan guarantees, low-interest financing, and lines of credit for major infrastructure projects. This strategy drew billions in private investment, and a similar strategy could be used to dramatically ramp up the production of affordable and homeless housing stock.

“Creating a mechanism to provide loan guarantees to these projects would streamline deals,” says Gary Painter, director of USC’s Sol Price Center on Social Innovation. “Further, guaranteeing gap financing for rehab projects to take existing buildings that require large upgrades or to adapt commercial spaces for housing the most vulnerable would go a long way to move many projects forward.”

While decades old, the Community Development Financial Institutions (CDFI) Fund has been key in driving private investment behind affordable and homeless housing.

Federal grants from the Treasury and low-interest bank loans facilitated by the Community Reinvestment Act, give CDFIs cheap capital to support low-income communities and the businesses that support them. CDFIs have also become a prized path for charitable foundations to offer long-term low-yield loans from their grantmaking portfolios, often called program-related investments, to support affordable and homeless housing development.

Put the Strategy to Work Now

In April, L.A.’s current mayor, Eric Garcetti, announced the settlement of a lawsuit, which if approved by the presiding judge and the City Council, will require the city to house 60% of the city’s homeless population within five years, at a cost of $2.4 to $3 billion.

Aside from Ruby Smith, L.A. City Attorney and current mayoral candidate Mike Feuer was one of the notables on the Zipper Hall stage.

Feuer was the only person to reference the use of private capital to tackle the homelessness crisis.

In a conversation a few days later, he told me that, if elected mayor, he would stand up a $1 billion fund to offer low-yield loans to build more permanent supportive housing. He agreed that the city needed more housing vouchers, and that loan guarantees would go a long way in de-risking private investment.

“I am calling on leaders from private equity and philanthropy and the major businesses in Los Angeles and making it clear that we will not sustain ourselves as a city unless each of you gets involved,” Feuer says. “Our public funding isn't going to be enough. We're going to have to draw on the private sector.”

Los Angeles’ charitable foundations hold at least $100 billion in their endowments. One-tenth of that sum could move 48,500 unhoused Angelinos into interim and permanent supportive housing, effectively ending street homelessness in the county. And that is without the banks, private equity firms, and hedge funds.

More than eradicating homelessness in Los Angeles, the commingling of deconstrained government funding and philanthropic investments will clear the path for a new flow of institutional capital. One where the energy of money is changed, moving from extraction to regeneration.

CORRECTION: The original version of this story mistakenly attributed the Colburn School's Zipper Hall to Frank Gehry. Zipper Hall in fact holds 430 guests, not 1,000 as appeared originally.

Read more stories by Daniel Heimpel.