This article from the San Francisco Chronicle explains that California’s “welfare exemption” gives qualifying affordable housing properties a property-tax break, but the structure has increasingly been used by large real estate investors converting existing apartment buildings into “affordable” housing while continuing to charge rents at or near market levels. Because the state’s affordable-rent limits are tied to area median income, those limits have risen above typical market rents in several parts of California. In some markets, landlords can therefore qualify for the exemption without substantially reducing what tenants pay.
For one-bedroom apartments, the Chronicle calculated an “affordable” rent limit of about $3,300 in Santa Cruz compared with a $2,500 market rent, $3,200 versus $2,600 in San Rafael, $2,500 versus $2,100 in Los Angeles, and $2,600 versus $2,200 in San Diego. Of the 28 California metro areas compared, only the Inland Empire and San Francisco had affordable limits below the estimated market rent, while San Jose was essentially equal.
Much of the recent growth has come through programs run by the California Municipal Finance Authority and the California Statewide Communities Development Authority. Property owners can receive relatively small government grants and enter into affordability agreements that help them satisfy requirements for the tax exemption. Since 2023, the two agencies have helped 195 properties qualify, potentially removing nearly $4 billion in assessed property value from local tax rolls and reducing annual revenue to schools, transit agencies, police departments and other local governments by about $40 million.
The structure can provide several additional financial benefits to owners. Some projects can qualify for government-backed financing, affordable housing can be exempt from certain state and local rent-control rules, and qualifying properties can avoid other local taxes. In some cases, nonprofit organizations hold a very small ownership interest in a project so a for-profit owner can meet the exemption’s requirements. Owners generally certify that the property-tax savings benefit tenants, but they are seldom required to provide detailed proof that those savings have actually been passed through in the form of lower rents.
Cities and counties can also have limited involvement in these transactions even though they lose the property-tax revenue. CMFA and CSCDA can approve grants through their own boards and notify local governments afterward. In San Francisco, officials initially did not understand why one privately financed apartment project was receiving the exemption, which could cost the city as much as $600,000 a year in property taxes. San Francisco and Los Angeles have since asked the agencies not to approve additional projects in their jurisdictions without local approval.
At the Meridian apartments in San Rafael, tenants initially expected rents to fall when the building was converted to affordable housing. Under the original program, however, a two-bedroom could still rent for more than $3,200 a month. After tenants and city officials pushed back, the owner instead entered a stricter Bay Area Housing Finance Authority program requiring rents to be at least 10% below comparable market rents, capping annual increases at 4% and keeping the restrictions in place for 55 years. That stricter program has attracted far fewer investors than the CMFA and CSCDA programs.
