The Meridian apartments in San Rafael look out on yacht slips and million-dollar homes. But tenants who have lived in the 1960s gray stucco complex over the years — most of them low-income immigrants from Guatemala and El Salvador — have come not for the view but to claim a rare working-class foothold in wealthy Marin County.
So when the Meridian’s new landlord said it wanted to convert the building to affordable housing, tenants were hopeful their rent would go down.
Instead, they learned, some rents would go up.
The conversion would be a better deal for the building’s owner, San Francisco-based private equity firm Tesseract Capital Group. The company could substantially avoid property taxes through a California law known as the welfare exemption — all without meaningfully lowering rents.
Because the rent limits on affordable housing have grown faster than market-rate rents in recent years, Tesseract could charge about $3,400 for a two-bedroom apartment — at or above what many of the tenants already paid — and still qualify for the exemption.
“It’s unjust,” said Glendy Barrios, a house cleaner who lives at the Meridian. “The owner isn’t paying his property taxes, and we’re still paying higher rents.”
The Meridian is one of hundreds of apartment buildings across the state that major investors — from Apollo Global Management to the California State Teachers’ Retirement System — are converting into affordable housing to take advantage of a quirk in housing law. In some places, affordable rent limits tied to area median income are so high that landlords can charge market rate and still qualify for a tax break.
As a result, the welfare exemption, meant to keep housing affordable, has instead become a tax avoidance strategy in which owners save hundreds of thousands or even millions of dollars a year without giving tenants a discount on rent, a Chronicle investigation found.
At a finance conference two years ago, Margaret Anadu, who then led the real estate arm of The Vistria Group, which describes itself as a “mission-oriented” investment firm, explained just how profitable affordable housing can be.
“In terms of just the risk-adjusted returns that you can achieve, they’re phenomenal,” said Anadu, whose firm has acquired over 2,000 units in California worth $750 million that are set to receive the exemption. “Whether someone is motivated by a personal passion around societal issues or really cares about the affordable housing crisis, it’s just a space to invest where you can make strong returns.”
Difference between the maximum rent allowed under California’s welfare tax exemption for a one-bedroom and market rent
Table: Nami Sumida/S.F. Chronicle ·
Using the tax break to boost profits appears to go against a basic requirement of the law: that the owner use the tax savings to lower rents for tenants or maintain affordability. Yet years of lobbying from the for-profit affordable housing industry has ensured this provision is rarely enforced. In practice, the Chronicle found, investors must check a box on a form assuring that the savings benefit tenants, and are seldom asked by agencies overseeing the exemption to prove that claim.
“We, the taxpaying public, agree to subsidize these properties year after year so that they can be affordable,” said Joel Rubenzahl, a 50-year veteran of California’s affordable housing industry who has pushed to reform the exemption. “But usually, in the long run, the owner gets the benefit, and they don’t pass it onto the tenant.”
As tenants like Barrios would learn, the welfare exemption has drifted far from its original purpose. It now involves layers of distortions, including quasi-governmental agencies that sidestep cities protective of their tax coffers and nonprofit organizations that act more like pass-throughs — resulting in affordable housing that isn’t affordable and public benefits that are difficult to justify.
The explosion in the use of the welfare exemption over the last three years has been fueled by two obscure government agencies run by private financiers, which have quietly developed a new pathway to qualify for the tax break that circumvents oversight by local elected officials.
These agencies, the California Statewide Communities Development Authority and the California Municipal Finance Authority, aren’t required to regularly publish data about the projects that they’ve helped qualify for the exemption. So the Chronicle conducted its own analysis of public meeting agendas and property tax data.
The analysis found that CSCDA and CMFA have enabled 195 property owners across the state to apply for the exemption since 2023, and could strip nearly $4 billion in value from California’s tax rolls — or around $40 million in revenue to local schools, transit authorities and police departments each year. The potential loss comes as many cities and school districts already face gaping budget shortfalls, with some asking voters to raise their own taxes to fill the gap.
These days, market conditions have made affordable housing deals more attractive than traditional market-rate acquisitions, and investors who once disregarded the sector are rushing in. Mention of the welfare exemption and the returns it can provide are circulating in pitchbooks and real estate conferences.
Yet many of these deals are happening without the knowledge or approval of local officials. San Francisco and Los Angeles, after discovering the programs, asked the agencies to stop approving deals unless city officials sign off first.
Investors say the deals can be a win-win for them and the public. Building a new affordable unit in the Bay Area can cost nearly $1 million and typically requires large subsidies, such as federal low-income tax credits, to make the numbers work for the owner. Buying an existing building and converting units into affordable housing is much cheaper, and requires no subsidy beyond the annual tax break to turn a profit.
The exemption can also make new projects that otherwise might not be built financially feasible. About a third of the deals facilitated by CMFA and CSCDA were new construction, most of them in Los Angeles County.
Even if rents don’t go down, their growth is limited by affordability limits. The rent caps mean the buildings can’t be sold to a new owner who could potentially force out existing tenants, renovate the building and push rents as high as possible.
The prospect of high returns, investors argue, is needed to attract the private capital that is essential to building and preserving affordable housing.
“It’s a useful tool at a time when there’s a lack of funding to build new affordable housing,” said Sarah Karlinsky, director of research and policy at the Terner Center for Housing Innovation at UC Berkeley. “The question is: What are the guardrails to ensure the public benefits?”
The chief requirement of the exemption is that landlords rent homes to low-income households, defined by California law as earning 80% or less of a metro area’s median income. The rents are generally capped by a formula at 30% of that income threshold.
But in recent years, as income levels rise and high-income earners push out lower-income earners in a number of metro areas, the limits on “affordable” rents climbed higher than market-rate.
Monthly rent limit for a one-bedroom affordable to a household earning 80% of the area median income, compared with CoStar’s market-rate estimates
East Bay
Los Angeles
Sacramento
San Diego
San Francisco
San Jose
The chart shows “affordable” rent limits for projects placed in service on or after April or May of each year. CoStar’s rent estimates are for Q2 of each year.
Chart: Nami Sumida/S.F. Chronicle ·
Investors took notice. With interest rates up since 2022 and market-rate rents stagnant, they could no longer count on a traditional “value-add” strategy — buy a building, renovate the units and push rents higher. The welfare exemption offered a workaround: buy a building with low rents, push the rates to the maximum allowable under the exemption, and still boost the bottom line by paying less in taxes.
The high affordability limits mean investors have their pick of market-rate buildings across California where current rental rates qualify for the exemption.
An analysis of census data, conducted by Apartment List for the Chronicle, found that more than 65% of one and two-bedroom market-rate units in San Francisco, San Diego, and Santa Clara County would have counted as affordable for low-income renters in 2024. In Alameda, Los Angeles, and Sacramento County, over 70% of them would have been eligible.
The ideal target for investors is a site like the 948-unit Park Kiely Apartments in San Jose, a 1970s property purchased by Vistria and Los Angeles-based Standard Communities last year. Renters were paying an average of $2,371 a month for a one-bedroom — well below the affordable rent limit of $3,083 a month.
So long as those households don’t make more than 80% area median income — $115,120 for one person, or $131,520 for two — the units count toward the tax break.
The tax break isn’t the only benefit for going “affordable.” The designation unlocks special low-interest loans backed by the government housing finance giant Freddie Mac, which the Park Kiely owners are using to fund renovations and increase their property value.
That’s not all. Affordable apartments are exempt from the state’s rent cap and many stricter local rent-control laws. In San Francisco, for example, prices for rent-controlled units could have risen 11% over the past five years for rent-controlled units, versus nearly 20% for affordable units.
Many affordable properties also rent to Section 8 voucher holders, who pay a fixed 30% of their income toward rent before the government covers the rest. When the owners raise the rent on those units, it’s not the tenant who pays more, but taxpayers.
And in Los Angeles, where nearly half these deals are located, affordable housing owners also avoid the city’s controversial new 5.5% transfer tax on residential properties worth more than $11 million.
Park Kiely
Owned by Standard Communities / The Vistria Group
948 units
$369M property value
Investors are realizing that the affordable housing strategy can be replicated outside California, too. Many of the same for-profit players scooping up properties here are taking advantage of similar tax breaks in Texas, Washington and North Carolina.
“It’s kind of a win both ways,” said Ben Lee, a Los Angeles real estate broker who helps investors identify properties that could fit the strategy. “We get rents that aren’t too far away from market rents, but we also get the property tax exemption, and we get to tell people how good we are through the process.”
The welfare exemption’s origins trace back to a 1944 voter-approved amendment to the California Constitution. At first, only properties owned by nonprofits that had charitable, hospital or religious uses could qualify. At the time, most rent-restricted low-income housing was public — built and owned by the government — and therefore already paid no property taxes.
But in the 1960s, funds for public housing dried up. The image of government housing was tarnished by stories of crime and substandard living conditions at high-rise superblocks. America shifted away from building its own low-income housing and instead began to subsidize private developers, both for-profit and nonprofit. In 1987, the California Legislature expanded the welfare exemption to them.
Since then, for-profit entities have pushed the legal boundaries of the tax break.
The law, for example, required for-profit entities to co-own the property with a nonprofit to access the exemption. This requirement spawned a cottage industry of what some call “rent-a-nonprofits,” which charge a fee to sign their name to paperwork that gives them a stake of less than 1% on the property, but satisfies the requirement.
Some investors have gone further, launching nonprofits with close ties to their own firms.
Post Investment Group is a Beverly Hills firm founded by Jason Post with more than 50,000 affordable units around the country. In 2024, Post’s sister incorporated a nonprofit called Foothill Affordable Housing, registered to the same address as Post. Four of the seven board members were executives from the investment company, including Jason Post. When a reporter emailed Foothill to ask questions, an “out-of-office” reply came from a Post employee.
Karl Miller, a lawyer for Foothill, said Post “does not control the nonprofit,” but “generously agreed to provide Foothill with various back-end support services.” He said Foothill later replaced the Post employees on its board, and that no current board members or officers are Post employees. Post’s sister, previously the executive director, stepped down in May 2025, he said.
Still, the current board members have ties to Jason Post and his other nonprofits.
“In many cases, the nonprofits are just shills,” Rubenzahl said. “They are there to help pad the pockets of related entities.”
Similar concerns surfaced in Los Angeles in the 1990s, when owners of low-rent, dilapidated housing were accused of creating shell nonprofits to obtain the exemption. That prompted the legislature to amend the exemption, requiring for-profits to obtain some kind of government financing in addition. Historically, this meant low-income housing tax credits, the largest federal
But shortly after the pandemic, a few real estate investors realized they didn’t need to apply for these competitive tax credits. All they needed was a small, token grant from a government agency to satisfy the amendment. Some investors approached cities including Oakland, asking them to provide such a grant, but elected leaders had doubts about whether tenants would benefit.
That’s when investors turned to the California Municipal Finance Authority, an obscure public agency based in an office park in Carlsbad that offered a remarkably simple solution.
CMFA is a joint-powers authority, which means it was created by two or more local governments banding together to outg its more than 350 member cities and counties issue municipal bonds — IOUs that local governments can sell to investors to help pay to build streets, affordable housing and other infrastructure
In 2023, the authority began offering “Charitable Affordable Housing” grants. Rather than going through a competitive process, these CMFA grants can be bought. An investor pays CMFA a multithousand-dollar fee based on the number of housing units. CMFA takes a cut, returns $10,000 to the investor as a “grant,” and signs a regulatory agreement that keeps the units affordable to tenants who make 80% of the area’s median income.
A second joint-powers authority, the California Statewide Communities Development Authority, launched a similar program late last year.
The grant and agreement do not automatically confer the tax exemption. But they fulfill a key requirement, allowing investors to then apply to the California Board of Equalization and their local county assessors, who ultimately sign off on the exemption.
Officials at CMFA and CSCDA say that they vet applications and don’t approve every one — though neither explained their criteria beyond following the law.
The programs have transformed this obscure corner of California tax law into a strategy used by major real estate investors including Kennedy Wilson, Belveron Partners, and Tom Steyer’s former hedge fund, Farallon Capital — and their ranks are growing. CMFA went from authorizing grants to just eight properties in 2023, the program’s first year, to 36 properties in 2024 and 68 in 2025, according to the Chronicle’s analysis.
CMFA and CSCDA have generated millions in fees from investors who receive the grants. Half of this money goes to private financiers contracted to manage the agencies. CMFA said it has collected $10.9 million in fees since 2023, with $5.4 million going to Sierra Management Group. CSCDA, which only began its program in November 2025, has collected $4 million in fees, with an estimated $2.3 million going to Bridge Strategic Partners, the Chronicle estimates.
“These appear to be private entities for all intents and purposes,” said Rubenzahl, the affordable housing advocate. “The staff seem to make the decisions and pocket the money.”
CSCDA blocked this reporters’ phone number after she reached out for comment several times to the agency and the two financiers, Jon Penkower and James Hamill, who handle most of the agency’s day-to-day operations. In a statement, the organization’s executive director, Felicia Williams, said the fees reflect the cost to manage compliance with state laws.
“I hope that in the spirit of supporting more affordable housing in California you can be respectful of those on the front line of fighting that battle,” she wrote.
Share of renter households paying less than the one-bedroom rent limit for households earning 80% of the area median income in 2024
Table: Nami Sumida/S.F. Chronicle ·ia Apartment List
For 17 years, Glendy Barrios and her family lived in the same two-bedroom, one-bath apartment at the Meridian, the 99-unit complex on the southern edge of the San Rafael Canal. The $2,000-a-month rent offered her and her husband, who works in recycling, a stable home to raise their three children even as the Bay Area’s cost of living kept growing.
In 2022, Tesseract Capital Group bought the market-rate building and soon posted a notice on Barrios’ door announcing its intention to renovate her unit. Tesseract offered her two options: She could receive $8,100 in exchange for moving out, or she could stay and sign a new lease in a different unit at a higher rent.
Fearing a move would disrupt their children’s education, Barrios and her husband signed a new lease for a unit down the hall for $2,800 a month. Parking, previously free, was now $175.
Further increases seemed inevitable. Barrios and a few of her neighbors banned together under a tenants union and appealed to the San Rafael City Council to implement stronger rent protections.
“We just want to live in peace,” Barrios said through a translator during a 2024 council meeting. “We do not have the reugh to cover all our bills and the expenses associated with raising our children.”
In April 2025, Barrios found a new notice on her door. The Meridian would be converted to an affordable housing complex, backed by a CMFA grant. To qualify, households needed to make below 80% of the median income in the San Francisco metro area: $108,320 for an individual or $139,840 for a family of three.
The one-bedroom apartments would be capped at $2,930 a month and two-bedrooms capped at $3,276.
But in San Rafael’s predominantly Latino Canal District, the median household income was $90,000. Nearly all families at the Meridian would qualify for the program, by a wide margin. The tenant union asked Tesseract to offer deeper affordability: Why couldn’t they set the limits instead at a 50% level, which would cap the rents at $2,176 for a two-bedroom?
“When they first started talking about this program, they said it was going to benefit us,” Barrios said. “That was a lie.”
The Meridian
Owned by Tesseract Capital Group
99 units
$33.9M property value
In an email, Tesseract President Derek Flores told the union that lowering the rents that much wouldn’t bring in enough revenue to cover repairs the company needed to make to the building’s foundation. And there was little incentive to lower the rents further: The law gave Tesseract no additional benefit for offering deeper affordability.
Flores told the tenants union that many residents would still benefit from the program. Half of the tenants, he said, would see their rent reduced, by an average of $185 per month.
But Barrios saw what was to come. Marin County incomes were only going to keep increasing. And her landlord would be able to keep raising the rent, too.
Even as CMFA and CSCDA have enabled dozens of deals, the cities and counties that stand to lose tax revenue have sometimes been kept in the dark.
In February 2025, a check for $15,000 arrived at the San Francisco Controller’s Office. It was from the California Municipal Finance Authority. No one knew what it was for, but the memo contained a clue: “Ventana Residences.”
CMFA has sometimes helped the city line up bond financing for affordable housing. But, as far as anyone in the city knew, the authority played no role in the Ventana Residences, a new privately-financed 193-unit complex in the Excelsior neighborhood built by San Francisco developer Presidio Bay Ventures.
“I don’t want to look a gift horse in the mouth here,” William Wilcox, the city’s housing finance manager, wrote to the agency, records obtained by the Chronicle show. “But I am wondering if you could explain CMFA’s involvement in that transaction.”
Ventana Residences
Owned by Presidio Bay Ventures
193 units
$114.9M property value
The $15,000, it turned out, was hardly a gift to the city. Instead, CMFA was sharing some of the fees it had collected from Presidio Bay, which had received a grant from the agency. San Francisco was set to lose up to $600,000 annually in property taxes from the building.
John Meany, head of acquisitions and development at Presidio Bay, defended the arrangement in a statement to the Chronicle. “We believe the program has the potential to encourage more private property owners to voluntarily restrict rents and provide additional affordable housing,” he said.
Even though San Francisco staff worried the tax losses would outweigh the affordability benefits, there was little they could do to stop the exemption from going forward.
To authorize grants, CMFA and CSCDA need only the approval of their own boards. The members, who tend to be retired city administrators, largely rubber-stamp every deal put before them by the financiers who manage the agencies.
Ben Barker, a financial advisor who manages CMFA’s grant program, told the Chronicle that even though the authority is not required to tell cities about the grants, it has notified every city or county in writing after board approval. If a city or jurisdiction opposes the project within 10 days, CMFA won’t move forward, Barker said. Williams, CSCDA’s director, also said the agency notifies all local authorities about grants.
But in many cases, these notifications are short emails sent only after CMFA or CSCDA signs off on a grant. Some local officials overlooked these emails until a check came in the mail, or a Chronicle reporter informed them about the deals.
San Francisco and Los Angeles, now realizing the extent of these deals, have asked the agencies to stop approving grants without their permission.
Anne Stanley, a spokesperson for San Francisco’s housing department, said the city objected to CMFA’s two deals there because they didn’t offer enough public benefit. “If deeper affordability were achieved,” said Stanley, “the policy rationale for applying a property‑tax exemption would be stronger.”
Some jurisdictions are losing their largest revenue generators. The 1,008-unit Bella Vista at Hilltop complex in Richmond, the highest tax-paying property in Contra Costa County after the county’s oil refineries, could come off the tax rolls in the next year. The lost revenue amounts to $2 million a year — half of which is meant to go to Richmond schools and community colleges.
At the Meridian in San Rafael, Tesseract had presented CMFA’s program to tenants as the only way to keep apartments as budget-friendly as possible in a pricey county.
But the tenants union wasn’t convinced. Working with the city, they found another government agency offering similar affordable housing preservation grants. This one was run by the Bay Area Housing Finance Authority, a regional agency created by the state Legislature in 2019 to fund affordable housing.
BAHFA offered a similar path: a nominal $5,000 grant and a regulatory agreement that could help the owner qualify for the welfare exemption. But its terms were tougher. Rents had to be set 10% below similar market-rate properties nearby, annual increases were capped at 4% and the restrictions had to remain in place for 55 years.
“Our program is designed to facilitate deals that will result in net public benefit, because those are the only projects that we believe are worth doing,” said Daniel Saver, BAHFA’s housing director. “Some decide our program isn’t the right fit for them because it won’t generate enough profit for them — and we are not doing those deals.”
San Rafael officials, who had previously backed the CMFA deal, pulled their support from it, and urged Tesseract to apply to BAHFA’s program instead. Tesseract didn’t have to — it could have instead just kept paying property taxes, and kept the building market rate, with no rent limitations at all. But faced with the threat of a longer fight from the city and tenants union, Tesseract agreed.
Under BAHFA’s program, Barrios now pays $2,925 a month. “The program is helpful,” she said. “But the rent is still much higher than before.”
But to Tesseract’s Flores, the program has been a success in keeping people in their homes. In the nine months since the Meridian conversion, just six households have left, much lower than the typical turnover rate. Tesseract has also offered residents hardship payment plans and forgiveness of back rent.
“The BAHFA program has given us a platform to work alongside our residents, the tenants’ union, the Canal community, and the City of San Rafael toward a shared goal: creating and preserving affordable housing,” Flores said in a statement.
In San Rafael, the tenants’ union had forced Tesseract’s hand. Elsewhere, the firm continued pursuing CMFA deals — including in Walnut Creek, Sacramento and El Sobrante.
BAHFA, with its stricter requirements, has struggled to attract investors. Since it launched in 2022, it has inked only eight deals. Meanwhile, CSCDA has facilitated 31 grants, and CMFA 168, though not all grants have resulted in closed deals.
Rubenzahl, the affordable housing veteran, has watched the exemption evolve over the decades. He worries the policy has become more concerned with satisfying technical requirements as it drifts from its goal: making housing accessible for low-income tenants.
“Yes, in some cases, the policy results in some housing that’s more affordable,” Rubenzahl said. “But in many cases, we’re just letting owners pocket money left and right.”
“Affordable housing,” he added, “is a big business.”
The Chronicle used artificial intelligence to read through hundreds of pages of CSCDA and CMFA agendas and staff reports to identify grants the agencies have awarded to property owners. Reporters manually checked all of the grants identified by AI to verify their accuracy.
To estimate potential revenue losses to local governments, reporters consulted county assessor’s websites to find the values of the properties that received grants, using a combination of manual work and AI-assisted web-scraping. We also manually checked the assessed value of the 20 most valuable properties that received grants, and a subset of the other grants to assure the accuracy of our estimates. The amount of expected value lost was calculated as the percentage of units deed-restricted at 80% of the area median income times the total property value, adjusted by a factor to reflect that the assessed value tends to decrease slightly when properties are deed-restricted. Because neither agency publishes an exact list of the apartment buildings that received grants, the Chronicle could not calculate a precise estimate as to the property value that could be removed from tax rolls.
Neither CMFA nor CSCDA has publicly disclosed how it has earned in fees from these grants, so the Chronicle also estimated those fees based on the agencies’ published fee schedules.
Reporting and data byKate Talerico.Graphics and development byNami Sumida.Editing byGreg Griffin,Caleb PershanandDan Kopf.Photo editing byEmily Jan.
Originally published on Oct. 5, 2026
