When California lawmakers passed a rent cap four years ago to protect tenants from large and frequent rent hikes, they exempted hundreds of thousands of units reserved for some of the state's poorest renters.

Low-income housing, after all, is usually built with public subsidies that already impose rent ceilings on developers and property owners. Some are already managed or overseen by local public housing agencies.

But California also has more than 350,000 privately owned low-income housing units -- built with the help of federal tax credits -- exempted from the state's rent cap. Residents of some of those units have seen their rents soar despite being the exact demographic the law sought to protect.

The 2019 law, known as the Tenant Protection Act, prohibits landlords from increasing rents more than a certain amount -- 10% this year, though usually it's less -- and more than once a year.

It's meant to guarantee some level of stability for tenants, proponents say. Without it, low-income renters like Miguel Contreras are seeing higher increases.

The 53-year-old mechanic got a shock when he opened a letter from his landlord this spring that said rent would go up from $1,828 to $2,138 -- an increase of 17%. The two-bedroom apartment in San Jose where he lives was financed in 2006 with low-income housing tax credits and reserved for renters who must make less than the local average. There's a rent ceiling, but the apartment isn't otherwise subject to state or local caps on how fast the rent can grow.

Contreras said he's lived in that apartment for more than two decades, and most of the time got modest rent increases of about $50 a year. But the past two years, the hikes have been higher.

When the latest increase kicked in this past July, Contreras was paying 25% more than he was just 13 months earlier, according to documents he shared with CalMatters. The rent eats up more than half of what Contreras earns each month, he said. He picks up extra work on Sundays, missing church with his family.

"It's hard to live in this apartment, it's supposed to be affordable," Contreras said through a Spanish interpreter. "But it's hard to move out because when you look for another apartment in the San Jose area, it's very expensive and it seems the owner is trying to raise the rent to be the same like other apartments that are not affordable."

With the help of the Regional Tenant Organizing Network, an activist group, Contreras and residents of several other low-income housing buildings owned by the same company drove to their landlord's office in Newport Beach to protest the rent increases, among other complaints.

The company, KDF Communities, has seven apartment buildings in the San Jose area and 40 across California. They closed their offices, and declined in an email to meet with the tenants, said James Huynh, an organizing network spokesperson. Mayra Peterson, a KDF executive, declined to comment when reached by phone by CalMatters.

Rent cap concerns

Not all private-market tenants are subject to the state's rent cap.

To ease concerns that the regulations would burden small or mom-and-pop landlords, lawmakers carved out exemptions for single-family homes and apartment buildings with only two units if the landlord lives in the other. Situations in which someone rents a room in a landlord's home are also exempt.

Also exempted are deed-restricted affordable housing or housing that receives any kind of government funding to house low-income tenants.

"The thinking was, if they're already rent-restricted it might not make sense to add another layer of complexity to it," said David Chiu, the former Assembly member who authored the 2019 law and current San Francisco city attorney. "This was a heavily negotiated bill."

The exemption for tax credit-funded properties in particular has fueled a quiet but complex policy debate over whether to further regulate rents.

Factors including inflation, rising insurance costs and the fact that many tenants were unable to pay rent during the COVID-19 pandemic have led to particularly high rent increases in low-income housing the past two years, said advocates for tenants as well as for nonprofit and for-profit low-income housing developers.

In many cases affordable housing is subject already to federal restrictions on rent by preventing tenants from being charged more than 30% of their income. But in tax credit-funded units, restrictions on rent are tied not to the tenant's individual income but to the local median income, a figure calculated by the Department of Housing and Urban Development each year.

In Santa Clara County, the median income is $181,300 based on a household of four, and in San Mateo County it is $175,000, according to data released by the Department of Housing in June.

In wealthy areas or times of high inflation, such as the past two years when median incomes have risen, that can create especially high rent ceilings, said Marcos Segura, a staff attorney at the California-based National Housing Law Project.

And where state or local rent caps don't apply, there are few other limits on rents in these affordable housing units, Segura said. As long as the rent stays below the federal ceiling, it can be hiked at whatever percentage and however many times a year a property owner chooses.

But advocates who tried to further regulate low-income housing this year say the solution won't be as simple as adding a rent cap.

Anti-poverty groups this year sponsored Assembly Bill 846, which would have imposed such a restriction. It ran aground early in the legislative session over concerns, raised mostly by nonprofit affordable housing developers, that a blanket cap would make it hard for them to keep their properties afloat.

Marina Wiant, vice president of government affairs for the California Housing Consortium, which represents both nonprofit and for-profit affordable housing developers, said property owners need to raise rents sometimes to cover operating costs and repairs.

The recent growth in median incomes, Wiant said, came after years of stagnation during which affordable housing landlords were able to raise rents little or not at all.

Many low-income housing tenants were unable to pay rent during the pandemic, putting nonprofit developers in difficult financial positions, she said.

Last year, the accounting firm Novogradac published a report that found operating costs for tax credit-funded units in California rose 26% between 2018 and 2021 while rental income only rose 11%.

Many affordable housing landlords work with tenants to try to keep rents low, raising rents on those who can afford a hike instead. Owners, she said, are worried a blanket cap will remove that flexibility.

"We are really trying to navigate, what could be something that helps residents not get hit with large rent increases at one time?" she said. "But that (also) doesn't fully challenge a property owner from being able to raise rents consistent with the regulations that already exist. And it's really hard to legislate a solution like that."

Tenant advocates want to bring the bill back next year, but said they're sympathetic to the concerns.

"We don't have an interest in affordable housing developers not being able to maintain the financial viability of their properties," said Anya Lawler, a policy advocate for one of the bill's sponsors, the California Rural Legal Assistance Foundation.

Nine other states -- including New Jersey, Wisconsin, Montana and Oregon -- do cap rents on low-income housing tax credit-funded properties. Some limit increases to once per year; others cap annual increases at 5%.

Local efforts

Some activists are pushing for local restrictions instead.

In Antioch, the tenant advocacy group of Californians for Community Empowerment last fall successfully pushed for the city council to pass an ordinance that caps rental growth and includes low-income housing.

Tax credit units are also now included in local rent caps in Richmond, Fairfax and Oakland.

This month, the alliance is filing ballot measures for the November 2024 election in four other Bay Area cities -- Redwood City, Larkspur, Pittsburg and San Pablo -- and Delano in the Central Valley that would impose local rent caps on tax credit units, legal and policy director Leah Simon-Weisberg told CalMatters.

Drafts of the measures show the organization is aiming to curb rent increases at between 3% (like the Antioch cap) and 5%. Simon-Weisberg said she's particularly concerned about corporate landlords buying up affordable housing units, and said those owners are more likely than nonprofits to raise rents to the maximum allowed by federal restrictions each year.

The proposals are sure to be fought by landlord groups such as the California Apartment Association, who say the properties are already heavily regulated. Low-income housing landlords in California, said spokesperson Debra Carlton, have affordability restrictions for 55 years, so unlike others who are subject to the state's rent cap, landlords can't just raise rents to market rates when tenants move out of a unit.

"You are getting in the way of owners who have entered into a contract," Carlton said. "You can't change the rules on them now ... You would really create some problems for those owners who would even want to go into the business."

But to Tachina Garrett, a former post office mail handler who moved into a tax credit property in Antioch after being priced out of San Francisco, the exemption for low-income housing is a "loophole" that should be closed. Garrett, 49, fought for the local rent cap last year after her portion of the rent increased by 40%.

"How are you supposed to live in affordable housing, but it's not affordable?" she said.

This story was originally published by CalMatters.