As affordable housing developers seek creative ways to structure projects, ground leases have become an increasingly popular tool—especially in land-constrained markets. But when using Low-Income Housing Tax Credits (LIHTC), particularly the 4% credit, developers must navigate specific rules set by the California Debt Limit Allocation Committee (CDLAC).
A ground lease allows a developer to lease land from a third party—often a private entity—while owning and operating the buildings constructed on that land. This structure can reduce upfront costs and preserve long-term affordability, but it must be carefully structured to comply with CDLAC regulations.
Key CDLAC Requirements for 4% LIHTC Projects
If you’re using a private third-party ground lessor, here’s what you need to know:
- No Letters of Intent Accepted: CDLAC requires executed Purchase and Sale Agreements and Lease Agreements—not letters of intent—to demonstrate acquisition value, funding sources, lease payments, or site control.
- Purchase Price Limits: The price paid to the ground lessor must not exceed the original acquisition cost plus reasonable closing, carrying, financing, and demolition costs.
- No new broker commissions or acquisition fees are allowed.
- Evidence of Land Cost: Land costs must be documented through a sales agreement, purchase contract, or escrow closing statement. These costs are not included in the Sources and Uses Budget, as they are reimbursed by the ground lessor.
- Budgeting Lease Payments:
- Do not list land cost under “Land Cost or Value.”
- Use “Land Lease Rent Prepayment” for upfront lease payments.
- Include annual lease payments in the 15-Year Pro Forma, with clear documentation or calculations showing how the payment was derived.
- Site Control Requirements: Must meet the standards outlined in CDLAC Regulations Sections 10325(f)(2) and 10326(g)(2).
Ground leases can unlock development opportunities on land that might otherwise be inaccessible. But for LIHTC projects, especially those using 4% credits, compliance with CDLAC’s detailed guidance is essential to avoid disqualification or funding delays. By understanding and adhering to these rules, developers can leverage ground leases to expand affordable housing while maintaining financial and regulatory integrity.