California to Cap LIHTC Rent Increases

A new state law broadens the CTCAC regs to include all LIHTC developments.

California Governor Gavin Newsom recently signed a bill (AB846) into law that will limit rent increases for tenants in LIHTC sites across California. This legislation is the latest effort in California to place a limit on rent increases for tenants.

In 2019, the state’s legislature passed AB1482, the Tenant Protection Act (TPA), which established a statewide rent cap that applies to multifamily properties that are over 15 years old. However, the TPA exempted affordable housing properties, including properties funded by the LIHTC program. And earlier this year, the California Tax Credit Allocation Committee (CTCAC) issued regulations that cap rent increases in LIHTC sites as a condition of receiving a new allocation of tax credits. Specifically, CTCAC rules from April 3 capped rent increases for new LIHTC sites receiving tax credits after April 3 or those planning to transfer ownership within the next five years.

This latest law broadens the CTCAC regulations to include all LIHTC developments, regardless of when they received tax credits. According to the law, CTCAC has until June 30, 2025, to create regulations specifying how this limitation will be implemented.

The CTCAC cap is different from the new ceiling instituted by HUD, as it applies at the tenant level and has a different calculation. When HUD issued its newest income limits in April, it announced a new 10 percent ceiling on the annual cap. Since 2009, HUD had limited the year-to-year increase in income limits as the higher of 5 percent or twice the percentage change in national median family income. Now, HUD places an additional parameter such that if twice the change in national median income is over 10 percent, the cap in that year can’t be greater than 10 percent.

In California, the maximum increase in rent in a 12-month period for a LIHTC household is now the lesser of:

• 5 percent plus the percentage increase in cost of living; or
• 10 percent of the lowest rental rate charged for that household during the previous 12 months.

The new regulation does not apply to the initial rent charged on vacant units. The initial rent for vacant units is still subject to the standard LIHTC limits, but once a household moves into a unit, the rent increases for that household cannot exceed the limits outlined above.

The cost-of-living adjustment (COLA) is determined in accordance with CA Civil Code Section 1947.12. The COLA to be used is the Consumer Price Index for All Urban Consumers (CPI-U) for the metropolitan area as published by the U.S. Bureau of Labor Statistics in April for the applicable geography.

Waivers and exceptions. A guidance memo addressed to owners of LIHTC sites in California for the CTCAC rules placed in April said the Executive Director may grant a waiver of the rent increase limit provided the owner can show that the proposed rent increase is necessary to ensure the financial stability or fiscal integrity of the project.

In addition, CTCAC Regulations Section 10328(a)(4)(B) allows an owner to exceed the rent increase limit without a waiver in the following circumstances:

• To increase the rent up to 30 percent of the monthly income of the household occupying the unit.
• For projects with terminated project-based rental assistance or operating subsidy as described in Section 10337(a)(3)(B); or
• A transfer of a household to another unit in the same property that has a different bedroom count or transfer to a higher AMI designation, as required by a public regulatory agreement or deed restriction, due to a change in the household’s income or occupancy from initial qualification.

The exceptions are designed to allow LIHTC developments to be able to use federal subsidies such as Section 8 and allow households to transfer.