Covering Your Bases in a Highly Regulated State — What Developers Need to Know

As the country’s most populous state, with almost 40 million residents as of July 2024, California has a significant population that requires housing. California is the third-largest state by land area, with a mix of urban, suburban, and rural areas. Due to a variety of factors, not the least of which is a finite amount of resources, California has not been able to keep up with the housing demand for its large population. Although the number of housing units produced annually has increased by roughly ten to 15 percent over the past several years, data from the California Housing Partnership’s 2025 Housing Needs Report suggests that California’s yearly housing production remains about 15 percent of what is necessary to produce the estimated 3.5 million new housing units the state will need by 2030.  

One of the challenges of producing housing for such a large population across a vast and diverse state is that there is no ‘one size fits all’ solution that works in every jurisdiction for every target population. Consequently, in addition to having a large population with a variety of needs, California also has a broad array of affordable housing programs, resulting in a diverse set of applications and regulations that govern affordable housing finance.

As a consultant and attorney who has worked exclusively to find and procure funding for affordable housing in California since 2001, I often find myself in the incongruous position of feeling frustrated by the regulatory structure’s inability to address certain situations, while simultaneously admiring the thoughtfulness and foresight that have gone into a system serving so many diverse situations that compete for the same limited resources.

While the regulations are dense and complex, there are a couple of threshold components that are important to understand when pursuing any affordable housing development in California.

California Has Multiple Housing Agencies
While many states consolidate all or most of their affordable housing functions under one roof, California has multiple public entities that govern different aspects of affordable housing finance. The tax-exempt bonds and Low Income Housing Tax Credits (LIHTC) providing the financial backbone for most affordable multifamily developments in California are overseen by the California Debt Limit Allocation Committee (CDLAC) and California Tax Credit Allocation Committee (CTCAC) respectively, each falling under the jurisdiction of the State Treasurer’s office and governed by committees composed of the State Treasurer, Controller, Department of Finance, as well as other appointed officials. The California Department of Housing and Community Development (HCD) falls under the jurisdiction of the Governor’s office. It administers various subordinate, soft financing programs funded with federal and/or state dollars. HCD also carries out a range of housing-related compliance and enforcement functions. Completing these major agencies is the California Housing Finance Agency (CalHFA), a self-sustaining state agency that acts as a conduit issuer for tax-exempt bonds throughout the State, provides permanent debt financing for affordable housing developments across California, and administers specific subordinate, soft gap financing programs not under HCD’s purview. Additionally, several joint-powers agencies and local jurisdictions issue bonds throughout California, and numerous private lenders provide permanent debt financing.

For most affordable housing developments, financing from just one of these agencies is not enough to make the development successful. While it is possible for a development to be financed solely with tax-exempt bonds, tax credits, and/or private sources, it is frequently necessary to secure financing from multiple agencies due to the competitive framework set up to receive the limited available resources.

While many projects can be financially feasible with awards of bonds and/or tax credits, the significant housing need and the limited amount of resources lead to demand typically far exceeding the available resources. During a typical funding round, the applicable agency receives applications for three times or more the amount of available funding. Consequently, CDLAC and CTCAC have adopted ranking criteria based on cost containment and/or leveraging the requested funding with other public resources.  

Numerous public sources generate various regulatory requirements related to underwriting, monitoring, and reporting, as well as deadlines for starting and completing construction, among other events. While several state agencies have made significant efforts to align these requirements over the past few years, they do not always match up clearly. Additionally, some financing from local jurisdictions (cities and counties) has historically been available for affordable housing. However, as the need has increased, more jurisdictions are taking on a larger role in financing affordable housing. This adds yet another layer of regulation.

Recently, Governor Gavin Newsom proposed what is known in California as a Governor’s Reorganization Plan (GRP) that would significantly realign the structure of these agencies. The GRP would combine all the programs currently administered by the governor’s office into one new cabinet-level agency, the California Housing and Homelessness Agency (CHHA). The full scope and success of that GRP will develop over the coming months. (Read more about the GRP here.)

Who Applies for Funding is Important
To facilitate LIHTC financing, most affordable rental housing developments are owned by limited partnerships where an affiliate of the developer is a general partner, and the tax credit equity investor is a limited partner. In California, affordable rental housing developments are also eligible for an exemption from ad valorum property taxes if they have a nonprofit corporation or a limited liability company whose sole member is a nonprofit corporation as a general partner within the ownership structure.

This property tax exemption is a crucial aspect of the financing structure for most affordable housing projects. Consequently, multiple entities participate in each development: the limited partnership that owns it, the developer general partner, the nonprofit general partner, and the development and nonprofit corporations themselves, along with affiliated or third-party guarantors and/or tenant service providers. This is significant because the roles of applicant, owner, or project sponsor for each agency and/or funding program can vary; in some instances, the local jurisdiction may need to be the applicant even though it will not serve as the ultimate owner or operator of the development. 

What Does It All Mean?
While the regulatory landscape for affordable housing is vast and dense, it can—and typically does—work together effectively. California requires a significant amount of housing, but it also generates a considerable amount of housing. Having knowledge of the various agencies and programs at the front end of your development will help you navigate the regulatory environment throughout the life of the development:

1. Identify the various programs that fit your project and for which you will pursue financing (you may not receive funding from all the desired sources, but identifying the potential sources early will inform the path of your development).
2. Understand the underwriting criteria for each program so that you can craft a financial model that will comply with all of them. While your financial model may not present precisely the same for each program, the underlying assumptions will be the same (and if you can’t satisfy all the requirements with the same basic assumptions, you will have identified programs that are not a fit for your proposed development early in the process).
3. Understand the timelines and milestones for each proposed program. Rarely do all the agencies have application rounds that run concurrently; often, success with one agency is a prerequisite to applying for financing from another agency. Setting a schedule and sequence for pursuing the required financing will help avoid inadvertently running into incompatible schedules.
4. Make sure you understand what role each entity involved in your development will have. While it may seem advantageous for different entities to apply for or sponsor applications to different programs, that strategy could result in overlapping and incompatible obligations down the road.

Although there are many other aspects of affordable housing development in California, being thoughtful from the beginning about the different sources of financing you plan to seek, as well as which entity (or entities) will be your applicants and sponsors, should help you position yourself favorably to meet various other requirements as you face them.