California Affordable Housing: HCD’s Final Loan Portfolio Restructuring Guidelines: What Owners and Investors Need To Know

The California Department of Housing and Community Development’s (HCD) final Loan Portfolio Restructuring Guidelines (the Guidelines), adopted June 9, 2026, was intended to create a workable path for affordable housing owners and investors to refinance HCD loans that were made to help finance affordable housing projects in California, thereby enabling developers to redeploy equity in order to create additional affordable housing while preserving long-term affordability on the existing housing stock. However, many in the development community have questioned whether the Guidelines are fair and reasonable and achieve the intended goals

Key Takeaways

• The Guidelines create a 50 percent housing reinvestment fee, which may be avoided.  The fee applies only to “other uses” that fall outside six enumerated categories of Extracted Equity. Owners who allocate refinancing proceeds to approved project costs, other affordable housing, reimbursements, deferred developer fees, or limited organizational needs do not trigger it. While the fee is therefore avoidable as noted above, it is unclear what the rationale is for charging such a high fee when the HCD Loan would otherwise be payable in full.
• A sale alone does not trigger the fee. The fee attaches to an HCD “Restructuring”—a refinance, early payoff, subordination, extension, or LIHTC syndication/resyndication—not to a sale or LP interest transfer standing alone.
• Early engagement matters. HCD recommends submitting a complete LPR application at least six months before the anticipated closing. Mapping uses of proceeds early is the best way to ensure each dollar fits within approved categories.

Background

The Guidelines amend HCD’s 2019 LPR framework and incorporate statutory changes from AB 130, SB 686, AB 2562, and SB 21. CCAH sponsored SB 686, and many of its core concepts were later incorporated into AB 130, now codified at Health and Safety Code Section 50406.

Covered Transactions

The Guidelines apply to “Restructurings” of specified HCD-funded or HCD-monitored multifamily housing loans. A Restructuring includes:

• An HCD loan extension or reinstatement of a qualifying, unpaid, matured loan
• Subordination to new senior debt
• Payoff before maturity
• Use of Extracted Equity
• LIHTC syndication or resyndication

If an owner sells an affordable housing property or transfers a limited partner interest without simultaneously restructuring HCD debt, the Extracted Equity requirements and the housing reinvestment fee should not apply.

What Counts as Extracted Equity

Extracted Equity generally means new debt added to an HCD-regulated project through a Restructuring, after excluding proceeds used for specified Donor Project needs, such as HCD-approved rehabilitation or repair, payoff of existing non-affiliate debt, reserve replenishment, or HCD-approved uses essential to the restructuring or that directly improve living conditions or long-term affordability.

Six Permitted Uses of Extracted Equity (Section 109)

The following uses do not trigger the 50 percent fee:

1. Other affordable housing projects. Proceeds contributed to HCD-approved Donee Projects that increase or improve affordable housing for low-income households. Funds must remain restricted and become permanent financing for the Donee Project.
2. Limited partner buyouts and exit taxes. Buyout of a limited partner and payment of exit taxes in a tax credit Donor Project after the initial 15-year compliance period (or under a ROFR/purchase option), if the purchase occurred on or after July 1, 2025.
3. Reimbursement of Sponsor advances. Documented predevelopment costs, capital improvements, or operating deficits tied to the Donor Project or other HCD-regulated projects owned by the same Sponsor, subject to HCD approval and the 60-month/36-month lookback rules.
4. Deferred developer fee.  Unpaid deferred developer fee on the Donor Project, provided repayment was not limited solely to Distributions.
5. Organizational activities. Up to 10 percent of amounts requested under categories 1–4 may support verifiable, reasonably necessary Sponsor activities (payroll, staff training, critical needs), but not discretionary bonuses or incentive payments.
6. Other HCD-approved uses. HCD may approve additional uses, but this is the category that triggers the housing reinvestment fee.

The 50 Percent Housing Reinvestment Fee

For “other uses” (category 6), HCD requires full repayment of the Original Program loan, including accrued interest, plus a fee equal to 50 percent of the relevant Extracted Equity. The Sponsor retains the other 50 percent; HCD’s share is reinvested in other state affordable housing projects.

The fee can materially reduce usable equity and may make otherwise reasonable portfolio-level decisions harder to justify economically. However, owners often can avoid it by allocating proceeds to enumerated uses, to direct Donor Project needs that are excluded from the Extracted Equity definition, or to reimbursement structures under Section 106(g)—which is not subject to Section 109 when the new senior debt does not exceed the original principal amount being paid off.

Other Conditions to Watch

Extracted Equity transactions carry additional requirements:

• Annual HCD monitoring fees
• Senior regulatory agreement requirements
• 1.15 debt-service coverage ratio for the Donor Project for 15 years
• 15-year bar on additional HCD funding for the Donor Project
• Ineligibility where HCD awards remain undisbursed
• Continued Original Program rent protections for existing tenants
• Misuse penalties, including negative points and repayment of 110 percent of misused amounts before future cash-out transactions

Early Payoff and Application Process

A payoff before original maturity requires HCD’s prior written consent and must be processed through LPR. Fully paid-off projects may still remain subject to reporting, audit, operating income, and reserve governance requirements while regulatory agreements remain in effect. Maturity payoffs and residual receipt payoffs with no additional restructuring activity are processed under original program terms, not the LPR Extracted Equity framework.

Bottom Line

Owners considering a refinance, early payoff, LIHTC resyndication, or other HCD loan transaction should engage counsel and submit a complete application well in advance of closing.