When Makan Mostafavi completed a small multifamily complex in South Los Angeles, he did not expect one tenant to take an interest in renting the entire property.
Mostafavi is the developer of Firestone, a four-story building featuring 20 identical studio units. Each apartment has its own bathroom, kitchen and balcony while common living rooms are located on each floor.
“It’s a brand-new building made out of shipping containers,” Mostafavi said. “We built it to be market rate. It just ended up that it became the pilot for the county’s master leasing program.”
Master leasing refers to a type of lease that gives the lessee the right to control and sublease the property during the lease, while the owner retains its legal title. It’s risen in popularity and has recently surfaced as a tool in approaching Los Angeles’ affordable housing crisis.
In March 2023, local managed care companies L.A. Care Health Plan, based in the Westlake neighborhood, and Health Net, based in Woodland Hills, committed to investing $114 million in the Housing and Homelessness Incentive Program over multiple years – with the Los Angeles County Homeless Initiative acting as the central coordinating body for that funding – to help address homelessness in Los Angeles.
Of the total investment, $55.6 million has been set aside for unit acquisition, with a goal of securing leases on at least 1,700 housing units for tenant-based voucher holders in the private rental market.
“We have a homelessness crisis in the county of Los Angeles,” Cheri Todoroff, executive director of the homeless initiative, said. “It’s a crisis that is experienced throughout the state and across the county, but we have very high numbers of people experiencing homelessness, including a significant percentage of those people who are unsheltered.”
There are more than 75,000 homeless individuals in L.A. County, more than 45,000 of whom are within the city of Los Angeles, according to the Los Angeles Homeless Services Authority. This makes it the U.S. metropolitan with the second largest homeless population, directly behind New York City.
The county is working with LAHSA, as well as the Los Angeles County Department of Health Services Housing for Health, to try to significantly reduce those numbers and get people into housing.
“It’s very clear to us that it is hard to engage somebody in their health care, particularly preventative care, when they have other major needs,” Sameer Amin, chief medical officer of L.A. Care Health Plan, said. “If they’re concerned about their physical security, they’re probably not going to go and get a colonoscopy.”
Of the minimum 1,700 units the county intends to acquire, a significant portion will be obtained via master leasing.
LAHSA is administering the county’s master leasing program, including handling property owner negotiations, lease signing and, once signed, essentially serving as the property’s landlord – overseeing tenant selection, property management and costs associated with vacancy, evictions and damage to units.
In the case of Mostafavi’s building, LAHSA signed a five-year lease with the ability to extend, the average term length for a master leased property.
As of May 31, LAHSA contracted 411 units across 10 sites, with 264 units already leased. Its goal is to have 2,000 units master leased by the end of the next fiscal year across the county.
Benefits of the model
Unlike other types of homeless housing – namely ground-up permanent supportive housing developments – master leasing expedites access to market rate buildings and units, allowing the system to house more people faster.
“With a master lease, you already have a property, and once you take over the lease, you can start to get people off the street,” Sonnet Hui, general manager and vice president at Project Management Advisors Inc., said. “The more traditional model of actually building these projects from the ground up takes years – five, sometimes 10 years – from entitlements and permitting and design and construction and all that.”
And even in comparison to existing affordable and permanent supportive housing developments, securing a unit for someone who is very low-income may be harder than one might think – even with an approved voucher.
Only 65% of people issued a voucher succeeded in leasing a housing unit and it takes an average of 122 days for those lucky enough to find a rental location, according to a survey conducted by Abt Global.
“Los Angeles County has a really competitive rental market. We have low vacancy rates, we have very high rents, and we have a lot of landlord choice and sometimes we have landlord preference and discrimination,” Todoroff said. “When you are dealing with a tenant who may be exiting homelessness, who may have some challenges with their credit history and maybe even some hits on their criminal background check, when a landlord is looking at that potential tenant versus looking at one who is coming with a pristine record, they’re likely going to gravitate to that one that has no hits on their credit history.”
For Todoroff, master leasing levels the playing field by reducing the traditional barriers related to accessing housing, as well as increasing opportunities for those tenants within the private rental market. And by taking on full subleasing and operating responsibilities, it can alleviate stress from landlords, too.
“It cuts through a lot of red tape,” Va Lecia Adams Kellum, chief executive of LAHSA, added. “The fact that we become the landlord means that we can reduce any of those barriers that slows up the process of people getting inside.”
And from a developer’s standpoint, master leases can be attractive since they act like a recurring cash stream, filling wallets while little work is needed.
As opposed to leasing out an apartment complex traditionally – in which landlords deal with tenant turnover and constant refurbishments, as well as vacancies – master leasing mitigates many of those worries. It removes the headache of management and gives owners a guaranteed state of return.
“I think the attraction for a master lease for the landlord is that the master tenant, which in this case would be the city’s entity, is a reliable tenant,” Ofer Elitzur, a partner at Century City-based law firm Cox, Castle & Nicholson specializing in affordable housing financing, said. “You’re going to be able to collect rent from them. They’re going to pay on time, municipal funds are designated for it. The landlord is happy about having a reliable tenant. On the flipside, the master tenant has been turning around and subleasing the units to a very difficult population of tenants.”
Not without some challenges
While there are plenty of landlord incentives that make participating in master leases tempting, they do come with some setbacks too.
If a landlord signs a five-year lease with an entity willing to lease up their whole space, for example, the landlord loses the ability to earn additional income or a better rate of return on their property.
Even though slight annual rent increases are standard in a master lease contract, the landlord forgoes their ability to stay on top of changing market conditions, including possible volatility.
And even with a tenant as reliable as the government, there are still fears that the tenant will default or there will be disparities between the way in which an owner wishes to upkeep their property versus a tenant.
“The landowner may be weary of having formerly homeless folks residing in a building, there can be substantial stress and strain on the building,” Elitzur said. “There could be concerns about the long-term viability of the building for any other use.”
Affordable housing experts also emphasized that merely shuffling people into housing isn’t enough to make programs like these successful.
“Homelessness does definitely start as a housing problem,” Elitzur said. “That being said, even if you designate housing to be available to folks experiencing homelessness, many of them need services and support to remain in their housing to make use of that housing. There are people who have mental health problems, there are people who have substance problems. And without the kind of assistance with those issues, merely providing housing isn’t sometimes the only solution.”
Other examples
While the county has taken a significant interest in master leasing as a tool to reduce homelessness, it’s nothing new.
“Los Angeles is a tough place to find housing at any level,” Joe Patel, managing partner of Nikki Investments LLC, said. “If we can take care of our weakest, then there’s that spiritual good feeling that you have too.”
Patel, who is also a member of the Apartment Association of Greater Los Angeles, was behind the interim motel conversion ordinance – a municipal code that was adopted in April 2018 which aims to make it easier to repurpose existing hotels and motels as transitional and supportive housing for people experiencing homelessness.
He is also the owner of seven motels dedicated exclusively to interim housing – which he has master leased to organizations such as Los Angeles Family Housing, Housing Authority of the City of Los Angeles, First to Serve and more – all of which support L.A.’s homeless population.
His motels, which are scattered across the county – located in Mid City through downtown to South L.A. – average 50 units or less. All of them have on-site management.
“My experiences are very simple in that once a nonprofit takes over a property, that property is for the better for the community,” Patel said. “They stabilize the people, there’s no back and forth. There are no new people checking in and out every day. Less traffic. The security element is there too. It’s better for the neighborhood and I can speak candidly about that.”
And although the benefits of master leasing make it an attractive option for organizations seeking to address affordability, other multifamily developers see its lure too.
“You don’t have to do anything. They take care of the property, they give you rent, they pay the taxes, the insurances,” Mark Weinstein, founder and president of Sawtelle-based MJW Investments, said. “If you have the right tenant, it’s a no-brainer.”
Weinstein – whose portfolio spans nearly 1,000 multifamily units and 7,000 student housing beds across eight states – has a 20-unit studio apartment complex in Hollywood that is master leased by King’s College for student housing.
“It’s like a triple-net lease,” Weinstein said. “Like when you have a retail tenant, and they pay for everything. It’s the same kind of thing.”
The financing dilemma
But although developers may see its lure, if a bank doesn’t financially back the master lease programs as well, some developers say it isn’t worth it.
“The financing is the hardest thing we ran into while we were building,” Mostafavi said. “You either have to be 100% affordable or a nonprofit to use tax credits to finance and build this. If you’re a developer like us, banks aren’t going to really lend on it.”
Mostafavi has had zero luck finding traditional lenders willing to bet on Firestone and has also had to resort to self-insurance. Because of this, he’s worried he won’t be able to sell the property and said he will probably steer clear of master leases in the future.
“We are not planning on doing any more (master leased) projects because we just can’t get financing for it,” Mostafavi said. “It’s a great program, but if the banks aren’t willing to lend, developers can’t build.”
Ari Kahan of West Los Angeles-based California Landmark Group, which has explored various avenues of master leasing but ultimately declined to do any, fears a similar experience.
“While there are a few key pitfalls to consider, it often boils down to one key issue, which is financing your property,” Kahan said. “In some instances, you are relying on the credit worthiness of a single tenant rather than a series of tenants and lenders may incorporate this into the underwriting and discount your finance proceeds accordingly.”
On the flipside, Patel and Weinstein have not reported any troubles financing their master-leased properties and instead have found lots of financial support from various banking groups.
“Generally, the mortgage lending market for apartment buildings looks at conventional tenants and conventional operating assumptions,” Elitzur said. “Lenders look for consistency and precedent in order to determine how they’re going to make a loan on a building. If there’s a master lease in place under a new program, where there isn’t a track record for how that’s going to operate, it’s going to fall outside of a traditional box and therefore make it potentially harder to borrow on.”
Short-term solution
While it remains to be seen whether master leases are a viable long-term solution in combatting homelessness, they do expedite access to housing.
“We have far too many homeless people and we need a solution,” Kitty Wallace, a senior executive vice president and multifamily expert at Colliers, said. “We’re short of 800,000 housing units so we need a solution for that as well. This is definitely an option.”
However, while this allows for the swift shuttle of people off the streets, signing a master lease itself does not generate any more housing units.
One of the driving factors of homelessness in Los Angeles is a lack of housing on all fronts, and in order to really solve Los Angeles’ housing crisis, experts agree that new developments must be built.
“This is one piece of the solution; it’s not the (singular) solution,” Elitzur said. “The most obvious point here is this does not create any more housing. This just designates existing housing to help folks experiencing homelessness. We need more housing in the state. This is part of a solution, but this by itself can’t be the only solution.”
“The crisis remains,” LAHSA’s Adams Kellum said. “We must continue to fight this terrible humanitarian concern with housing. That’s what ends homelessness.”
