SoLa Impact’s Martin Muoto on Building Affordable Housing in LA at $250k per door?

Martin, we last interviewed you in May of 2020 about SoLa Impact South LA housing.  Share with readers the mission and what defines SoLa.

Martin Muoto: I spent most of my career in private equity, but I grew up in West Africa—which informed a lot of my thinking about how the world works. I came to the States when I was 18 years old with $440 and two suitcases. My parents said, “Listen, if it doesn't work out, you can always come back.” They had bought me a round-trip ticket. Other than the ticket, they could not afford to send me to the States; so, I was fortunate that I got a full scholarship to Penn and Wharton School of Business. I worked in a kitchen during school; and, it was different seeing poverty from that perspective. My parents grew up very modestly, but they cared a lot about education.

After graduating from Wharton, I spent the first half of my career working for private equity firms investing in technology. The big takeaway was I felt that technology is one of the great equalizers in the world. It's an opportunity for people regardless of color or background to gain skills, which is exemplified in our Tech Center. 

I've always been a free enterprise thinker, and I've always believed in free markets and innovation. Over the years, I have also become convinced that capitalism run amok is one of our biggest global problems, along with climate change. Growing income inequality between the rich and the poor is one of the things that plagues this country and many others. 

Having grown up in West Africa, you saw what happens when there's too big of a gap between poor people and rich people. There, rich people have to build very high fences, hire security guards, and isolate themselves.  Every great empire has fallen because the rich get too rich, and the poor decide they have had enough. I have continued to believe that inclusive, sustainable capitalism is the best – possibly the only -- path forward for this country. 

Does the latter underpin the platform of SoLa in South LA?

Our motto is “Doing Well by Doing Good.” Our not-so-secret agenda is to prove that you can be a “for-profit” yet be a very responsible contributor to the community and invest heavily in the success of the community. One of the underlying principles is that the better our residents do, the better we do. To me, it is very common sense.

Getting back to our beginnings, I started buying apartment buildings in Venice, Echo Park, and a bunch of other places in LA, and I did very well. But I realized very quickly that there were a lot of very smart, well-capitalized investors in all these areas. The numbers led me to South LA, Compton, and Watts because I looked at the data – things like gross rent multipliers, cap rates, etc. Those numbers looked very good on paper, but why wasn't anybody investing in these areas if they supposedly provide such good returns?

I started visiting South LA and similar Black and brown communities, and it became very apparent to me that no one was investing.  Every developer, contractor, and broker that I spoke to said: “You're going to lose your shirt. They're going to vandalize your place; you're going to deal with crime and so on.” I’d say that they were 98.3 percent wrong.

The vast majority of people were honest, hard-working people that wanted a safe place for their kids.  If you can give them a good product, something that they could be proud of, they would ultimately work with you to make it their home, keep it safe, pay rent, and do all the things that we're all accountable to do. 

In 2020, you controlled through ownership of a few thousand units in South LA.  Update us on Sola Impact’s growth.

One of the big pivots that we made since 2020 was that we had bought 150 buildings with 1500 units. Those 1500 units were ‘naturally-occurring affordable’ because they, relative to other geographies, were much more affordable. However, Sola Impact had not added one unit to the housing stock of LA. Fundamentally, we realized that you were not going to solve the problem of affordable housing and the lack thereof and homelessness without building. 

Right around that time, we pivoted to doing a lot more ground-up construction.  We now have roughly 1500 units that are under construction, and we will build another 2000 in the next 2 years.  With this last fund, we raised close to $300 million that would allow us to deploy nearly a billion dollars, all of it in South LA and similar communities throughout Southern California.

Almost all of it is covenanted and uncovenanted affordable housing. We refer to it as “essential housing.”  Basically, we figured out how to build very affordably.

In our last interview, you noted that even with HHH funding, new affordable housing units were coming in at $400,000 or $500,000. SoLA’s new housing was a fraction of that cost.  Share how that’s possible.

I get asked this question very often and when I give my answer, many people do not believe me.  We have been able to build at $250,000 per unit.  I double underscore that is the all-in cost, hard cost, land cost, soft cost, and so on. I’ve asked one of the leading accounting firms to come in and audit that number, simply because so many are skeptical that it can be done and we will share those results.

The truth is that everyone is looking for that one 'magic bullet' for how to do this.  In reality, it’s not one lever – it's hundreds of small things we do every day.  We watch every nickel and dime because we have to. This is private capital. These projects have to make money, and in order to do so while keeping rents affordable, you have to focus on every single penny spent.

If I had to distill it, it comes down to a few things:  one, we have scale – we are the largest developer of affordable housing in the areas we build in; two, we have standardized our product and look to “standardize and simplify” every step of the process; and three, we are “control-freaks.” We do a lot of things in-house that allow us to control costs. We have a staff of almost 200 employees at this point all focused on cost savings. 

We have this maniacal obsession with driving down the cost. Fundamentally, my belief is these prices that you refer to, which have now escalated to $700,000 or more per door are not affordable. The taxpayers who voted for these bonds can't even afford a home at that price. Why are they subsidizing a $700,000 apartment? It makes no sense to them. We think that we all have to work together: the government, the nonprofit sector, the philanthropic sector, and the private sector, to drive costs down to what's reasonable, scalable, and affordable.

I’ll save the details for our next interview when we are further along, but candidly, we believe—and we are working on some initiatives—that could bring the “all in” cost of construction to under $200,000 per door over the next 3-5 years. 

Who, re talent, have you attracted to date to SoLa?

We are in a battle for talent. We want people that would otherwise work for Google, Goldman Sachs, or Tesla to come to work at SoLa. We want the best and the brightest.

We are working on the most important problems facing the country, which are income inequality and climate change. We're working on both of them here. To do that we need people that are, to some degree, mission-aligned, but more importantly, that are going to bring that expertise and work tirelessly day and night to try to solve those problems.

That is what free enterprise and innovation and capitalism allow, right?  We partner with the best nonprofits, and they are soldiers in arms with us, but I don't want to be around in 30 years pounding my chest about how long I've been in South LA with the problems still being around. I want to solve the problem and our superpower is that we're pragmatists. We're not ideologues. We will take the best of capitalism, the best of socialism, and the best of communism and put it to work.

Two years ago, you were Investing Opportunity Zone funding. Is this still true?

Opportunity Zones were good to us because we figured out how to do it, not only by the letter of the law, but the spirit of the law. It was fundamentally designed to incentivize private individuals to invest in low-income communities.

Unfortunately, I think a lot has been written about how a lot of the dollars went to areas that were rapidly gentrifying and didn't need investment dollars, but some of those dollars went to South LA and we are appreciative of that.

It also did a couple of important things.  First, it forced investors to have a long-term perspective on their investment.  There was a 10-year hold requirement, and that is difficult to get investors to do.  By legislation, they were forced to do it.  Second, it required that you doubled the basis of the investment, which means that you had to create value, and, candidly, in the last 10 years, I think a lot of real estate investors were “value extractors” not “value creators”. They bought a four cap and sold at a three cap. They made tons of money, so good for them

We've fundamentally always believed that the way to be good investors in real estate is by doing the hard work and creating value.  We've always felt that by designing intelligently and by building and going through the entitlement process—that’s incredibly hard work, by the way, especially in California—that’s how you create value.

The Opportunity Zone made it easier for investors to take on the risk of doing ground-up development, which is very tough in LA. We had a $120 million Opportunity Zone fund in 2019.   And then we raised $300 million last year predominantly in a non-Opportunity Zone Fund called the “Black Impact Fund.” And while we aren’t obligated to invest in Opportunity Zones, we were investing in these areas before the legislation, and we will be doing so after it’s gone.

We're are very fortunate in our ability to attract institutional investors.  Attracting these institutional investors— pension funds, insurance companies, banks, and foundations and endowments—to  Black and brown communities like South LA has been challenging. We went to all the largest philanthropic organizations that I thought would come out of the woodwork and say 'absolutely.' This is a Black-led fund that invests in Black and Brown communities and housing. But guess what?  Most of those philanthropic organizations said it was too risky for them. 

We ended up being able to find and get great investors that wanted great returns but also cared deeply about the communities we were investing in. Institutions like CalSTRS, PayPal, PNC Bank, and Ally Bank, and a lot of others.  But we got a lot of rejections and a lot of kicks in the teeth. 

Covid obviously seriously impacted the globe and Los Angeles. How did SoLa address those impacts? How did your investors and tenants respond?

We really became experts at making lemonade out of lemons. 

We bought the Beehive campus about four months before COVID.  Some of our investors asked us, 'What do you know about commercial real-estate?' They had barely gotten comfortable with us as residential real-estate guys. We said we had this vision of an ecosystem that would be in the South LA community. The impetus of the Beehive was to create jobs and to really enable entrepreneurship in South LA.

We swallowed very hard when we bought this big campus and then four months later, COVID happened. We were in a predicament. For example, no one knew if employees would ever go back into the office.  But we believe one-story buildings (as opposed to high-rises) with high roofs are still more attractive for companies post-COVID.  That said, we factored that great outdoor space would still be valuable, so we spent a lot more money than we budgeted for in the outdoor space to create the unique look and feel of the Beehive. We scrambled and got into the 'events' business and started to attract movie shoots, commercials, and music festivals to our outdoor space.  That outdoor space of the Beehive is now the highest grossing per square foot of the Beehive and has caused it to be a cultural hub of young, creative Black and brown entrepreneurs who previously didn’t have a space to call their own. 

I'll give you another example.  every window, door, and partition was built here on site. The reason that happened was that we had a vendor that was going to import a lot of the steel windows and doors from China. Then, the tariffs hit, and the ports all locked up. It was going to be more expensive and take who knows how long. So we hired two journeyman welders. People showed up at the Beehive looking for work because everything was shutting down. We trained over 40 people as apprentice welders. We built every single door, window, partition, and everything that's made from steel. It created jobs and we did it for 60 cents on the dollar.

On the tenant side, most notably, we launched this COVID Retraining and Recovery Fund. We raised $1 million dollars, with the help of Oprah Winfrey and several of our investors to help 200 adults to train them into skills in healthcare and technology. The idea was similar to the global financial meltdown when people went back to school learned another set of skills that allowed them train in new fields that were more lucrative. In South LA, they became medical billing and coding folks or they got digital marketing skills. That was our response to how you impact the community during a time like COVID. The COVID initiative was sort of the precursor to the Tech Center.  And Riot Games stepped up with a major donation to make that possible – which we are eternally grateful for. 

Martin, on the front pages of the LA Times recently have been stories about the implosion of Skid Row Housing Trust. What real estate lessons ought to have been learned by affordable housing developers?

It's very challenging. We all had maintenance problems during COVID, candidly. Many residents didn’t want us to enter the units, but then later complained when the problems weren’t addressed.  As a private enterprise, we went to our investors and said we needed to overcorrect, and we did. We spent probably $10 million investing in our buildings and preemptively addressing all of the issues that we had. 

I chose not to comment on Skid Row Housing because we love our nonprofit counterparts, but it doesn't scale, fundamentally. You can’t simply continue to absorb operating losses and expect that model to work, especially when you need to make large capital improvements.

Some of your newer projects are built using modular architecture. Address what the benefits are of modular housing and the comparable costs?

We are very excited about a bunch of our modular projects. We've spent the last 18 months visiting modular vendors all over the US and spent considerable time evaluating them.

All the modular vendors have a very similar business problem, which is that today, they are bidding on SoLa’s business tomorrow, but also a big project in New Mexico for senior housing and also a Hyatt Regency in Texas. They all have very fundamentally different design ideas and so on.

There's no way that they can physically set up their infrastructure to be static. They've got to customize for every customer in order to win their business.

 We are thinking of ways to change the entire paradigm in the modular space and over time and with scale, we think that we can get the all-in costs for under $200,000 per door – in Los Angeles, for ‘all in construction.” If we are able to this, it’s a complete gamechanger.  

Martin, as we’re doing this interview at Sola Impact’s Beehive, share its features and your original conception and ambitions for it?

The Beehive is five acres, 120,000 square feet with multiple buildings with many uses. We are standing in the Sawtooth. The Radiant is unoccupied, but we use it for event space.  There is also the Technology & Entrepreneurship Center powered by Riot Games.

The original idea was that we wanted Black and brown and women-owned businesses to have a unique space where they could occupy, collaborate, and compete. At the time, we thought they would also want to take advantage of the OZ legislation, which allows businesses to get tremendous tax benefits. 

The idea was to try to build that ecosystem locally.  In some respects, it has succeeded beyond our wildest imagination. If someone writes a book, I will happily claim I had this very clear vision. It's not entirely true. It was largely the Darwinian process, and we sort of stumbled our way forward. It has evolved, but we are thrilled and the community has really embraced the Beehive as its own.

While our hope is to attract women-owned and minority-owned businesses, if Google shows up and wants to occupy one of the buildings, we’re gonna oblige. We've had Google come out and rent the campus because they were launching a feature in their new Pixel phone that's corrected for skin tone. It was culturally appropriate for them to be to do that in this community. We went, “hallelujah” and they paid very well for the space.