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California has implemented rent control measures to limit rent increases and prevent unjustified evictions. However, these regulations may not significantly impact properties under the Low-Income Housing Tax Credit (LIHTC) program, which provides affordable rental housing for low- and moderate-income households. While LIHTC properties in California offer below-market rents, the program's rules regarding rent calculations and increases are complex and often unclear to tenants. Understanding the interplay between California's rent control laws and the LIHTC program is essential for tenants and landlords alike, especially when considering the potential financial implications and tenant protections.
| Characteristics | Values |
|---|---|
| Purpose | To encourage the creation of affordable rental housing for low-income households |
| Type of incentive | Tax credits |
| Rental rates | Below-market rate |
| Rent increase cap | Yes |
| Rent increase calculation | Based on the actual rent charged to the tenant and the applicable LIHTC rent limit |
| Waivers | Allowed if the property owner can demonstrate the need to ensure financial stability |
| Rent restrictions | Yes, for 55 years in California |
| Applicability | For projects within 15 years of receiving a certification of occupancy, rent restrictions may not apply to market rate units |
| Tenancy termination | Requires good cause and just cause |
| Examples | California's A.B. 1482 |
| Eligibility | Based on income certifications and unit accessibility |
| Financing | Through private investors |
| Subsidies | May be available through other sources, such as project-based Section 8 |
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What You'll Learn
California's rent control laws
In 2019, California passed the Tenant Protection Act (AB 1482), which created new protections for residential tenants. The Act caps rent increases for most residential tenants in California. Landlords cannot raise rent more than 10% total or 5% plus the percentage change in the cost of living, whichever is lower, over a 12-month period. Local rent control laws may further restrict how much a landlord can increase rent annually.
The Tenant Protection Act applies to all residential rental units in the state, except those specifically identified in the law. Some examples of properties not covered by the Act include single-family homes not owned or controlled by a corporation or real estate investment trust, units covered by a local rent control ordinance that is more protective than the Tenant Protection Act, and units issued a certificate of occupancy within the past 15 years.
It's important to note that California's rent control laws do not apply to LIHTC properties, which have their own rent increase caps. However, there may be some overlap in how the provisions apply to market rate units inside of a LIHTC development. Overall, California's statewide rent control laws are intended to ensure affordable rental housing, stabilize the population, and address the state's housing crisis.
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LIHTC rent increase caps
In California, affordable housing properties financed by low-income housing tax credit (LIHTC) have a rent increase cap in place, which was approved by the California Tax Credit Allocation Committee (CTCAC). The maximum increase in rent over a 12-month period for a LIHTC household in California is now the lesser of: a 5% increase plus the percentage increase in the cost of living, or a 10% increase on the lowest rental rate charged for that household in the previous 12 months. This rent increase cap does not apply to the initial rent charged on vacant units.
The LIHTC rent increase cap in California is different from the cap instituted by the US Department of Housing and Urban Development (HUD). The HUD cap limits rent increases to 10% annually, regardless of the median income change. The HUD cap is not based on the tenant level and has a different calculation method.
The LIHTC rent increase cap in California is intended to stabilize rents and provide tenant protection. However, it may result in smaller rent increases for some tenants, and it may also make it more challenging for tenants to qualify for LIHTC-funded housing. Additionally, property owners may experience tighter budgets due to lower rental income.
While the LIHTC rent increase cap in California aims to protect tenants, it is important to note that there are concerns about the additional compliance burden on property owners. The specific details of how the rent cap will be implemented and its potential impact on the transfer of properties after 15 years are yet to be addressed.
It's worth mentioning that California's statewide rent control measures, such as A.B. 1482, are expected to have little impact on LIHTC properties. These laws focus on rent restrictions and just cause provisions for termination of tenancy, which may not apply to all LIHTC developments or market rate units within them.
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LIHTC eligibility
In New York, the Low-Income Housing Tax Credit (LIHTC) program is allocated to affordable housing projects for residential use or residential with Community Service Facility use. To be eligible, projects must be new constructions, building acquisitions with rehabilitation, or rehabilitations including adaptive reuse of non-residential property.
Eligible households must be low-income, earning up to 60% AMI (80% AMI for projects with LIHTC income averaging). Additionally, one of the following requirements must be met: 20% of the units must be set aside for households earning up to 50% AMI; 40% of the units for households earning up to 60% AMI; or 25% of the units for households earning up to 60% AMI in specific cases. Projects proposing income averaging must ensure that at least 40% of the units (or 25% for projects in New York City) are both rent-restricted and occupied by individuals who do not exceed the imputed income limitation.
Nonprofit and for-profit developers are eligible to apply for LIHTC funding. The funding amounts vary based on the location within New York State and the specific characteristics of the project, such as the number of units with three or more bedrooms to serve large families.
In California, while there is a statewide limit on rent increases and requirements for just cause for eviction or termination of tenancy, these provisions do not apply to LIHTC properties. However, there may be some impact on market rate units within LIHTC developments. Additionally, California has implemented a rent increase cap for LIHTC properties, which is effective from August 1, 2023, to July 31, 2024. This cap is based on the actual rent charged to tenants in relation to their neighbours' rents.
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LIHTC and market rate units
The Low-Income Housing Tax Credit (LIHTC) program is the largest federal program that encourages the creation of affordable rental housing for low-income households. It was enacted as part of the 1986 Tax Reform Act and has generated over 3.5 million units since its inception. State housing agencies award credits to private developers of affordable rental housing projects, who then sell them to private investors for funding. Once the housing project is made available to tenants, investors can claim LIHTCs over a 10-year period.
The LIHTC program provides below-market rate rental housing to thousands of Californians. While LIHTC properties are subject to rent restrictions, California's statewide rent control laws are unlikely to impact them. This is because IRC Section 42 already requires good cause for termination of tenancy for LIHTC tenants.
However, there is some uncertainty regarding how California's rent control laws would apply to market rate units inside LIHTC developments. For projects within 15 years of receiving a certification of occupancy, rent restriction provisions would not apply to the market rate units. On the other hand, for properties outside of this 15-year period or for acquisition rehab projects, it is unclear if exemptions apply to all units or just those restricted as affordable units.
In addition to rent restrictions, LIHTC developments in California must also comply with income limits. For example, Los Angeles increased its income limits by 10% in 2024, resulting in lower rents for existing tenants but also lower revenues for owners. To balance this, owners can still charge the LIHTC maximum for vacant units.
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LIHTC development financing
The Low-Income Housing Tax Credit (LIHTC) is the largest federal program that encourages the development of affordable rental housing for low-income households. It was introduced in 1986, with states receiving $1.25 per resident from the federal government. Since then, the LIHTC cap has increased, with Congress setting a limit on the amount of LIHTC that can be allocated annually. For instance, in 2023, each state was allocated $2.75 per capita.
State housing agencies administer the LIHTC program within general guidelines set by the Internal Revenue Service (IRS). These agencies review tax credit applications from developers and allocate credits, prioritizing projects that serve the lowest-income tenants and ensure long-term affordability. Developers typically sell these tax credits to investors, who contribute equity to the project. The tax credits can also be claimed by developers themselves, although due to limitations, most choose to involve investors.
Once a developer secures a tax credit reservation, they must leverage various financial resources for the development. This typically involves securing a conventional loan from a private mortgage lender or public agency, gap financing from public or private sources, and equity from the developer or private investor in exchange for the tax credits. The LIHTC is designed to subsidize either 30% or 70% of the low-income unit costs in a project. The 30% subsidy is known as the automatic 4% tax credit, while the 70% subsidy is referred to as the 9% tax credit.
To maintain compliance with LIHTC requirements, state housing agencies require property owners to certify annually that they are renting units to qualified low-income tenants. If property owners are found to be non-compliant, they may lose some of their credits. These compliance requirements typically apply for at least 30 years after project completion, during which owners must keep units rent-restricted and available to low-income tenants.
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Frequently asked questions
LIHTC stands for Low-Income Housing Tax Credit. It is a federal program that encourages the creation of affordable rental housing for low-income households.
LIHTC properties in California provide below-market rate rental housing. The rent charged to tenants in LIHTC properties is subject to a rent increase cap. However, there are provisions that allow owners to charge market-rate rents under certain conditions.
Under federal rules, owners must comply with rent restrictions for at least 30 years. If the development reaches year 30 without adding any new affordability requirements, the owner could start charging market-rate rents. California imposes rent restrictions for 55 years.
The rent increase cap is based on the actual rent charged to the tenant. For example, if the neighboring household in a two-bedroom home pays $1,500 per month, the rent for the LIHTC unit could be increased by up to $132 per month, assuming the new rent does not exceed the applicable LIHTC rent limit.
