California Proposes Statutory “Good Cause” for LIHTC Lease Non-Renewal
By A.J. Johnson
A.J. Johnson Consulting Services, Inc.
Williamsburg, Virginia
California Proposes Statutory "Good Cause" for LIHTC Lease Non-Renewal:
AB 2689 Would Permit Non-Renewal for Over-Income Households
in 100% Affordable Properties
April 2026
California Assembly Member Ávila Farías has introduced Assembly Bill 2689, a measure that, if enacted, would add a new Section 50199.26 to the California Health and Safety Code. The bill would define a statutory meaning of "good cause" for the non-renewal of a lease in a Low-Income Housing Tax Credit (LIHTC) property—specifically, properties where 100 percent of the residential units (excluding any manager’s unit) are restricted to lower-income households under a binding regulatory agreement with a government entity.
This article explores the bill’s main provisions, the federal regulatory framework within which it functions, and its practical importance for owners, managers, and compliance professionals in the LIHTC industry.
AB 2689 would define "good cause" for lease non-renewal under the extended use agreement required by Internal Revenue Code (IRC) Section 42(h)(6). Under the proposed Section 50199.26, good cause for non-renewal of a lease would exist when both of the following conditions are met.
1. The household’s income exceeds 140% of the area median income (AMI) for at least two consecutive years; and
2. Thirty percent of the household’s monthly income is more than the fair market rent (FMR) for the county where the unit is located.
The bill is narrowly targeted. It applies only to properties where the extended use commitment requires 100% of the units to be income-restricted—that is, fully affordable developments. Mixed-income properties with unrestricted or market-rate units would not be affected. The bill also requires that the household’s income status remain for at least two consecutive years before non-renewal can be pursued, ensuring that a single year of higher income does not trigger the provision. Additionally, the requirement that the household’s rent burden (at 30% of income) exceeds the county’s fair market rent acts as an extra safeguard, confirming that the household has meaningful access to market-rate housing options.
Understanding why AB 2689 does not conflict with the federal LIHTC statute requires a careful reading of IRC Section 42(h)(6). The extended low-income housing commitment mandated under that section includes a prohibition against "the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit." See IRC §42(h)(6)(B)(iv) (as cross-referenced by IRC §42(h)(6)(E)(ii)).
Critically, the federal statute does not define "good cause." Congress left this term to be interpreted and applied in accordance with applicable state and local law. This is not an oversight—it is a deliberate structural feature of the LIHTC program. The program is administered at the federal level through the IRS and at the state level through state housing finance agencies (HFAs) acting as allocating agencies under IRC §42(m). Each state’s extended use agreement is the binding instrument that governs tenant protections during the extended use period, and the substantive content of "good cause" is determined by the law of the state in which the property is located.
The IRS has not issued regulations, revenue rulings, or formal guidance defining "good cause" for the extended use commitment. The IRS’s Guide for Completing Form 8823 mentions the good cause requirement but does not provide a federal definition. Consequently, whether there is good cause for non-renewal of leases in LIHTC properties depends on, and has always been a matter of, state law.
AB 2689 operates squarely within this framework. By establishing a statutory definition of good cause under the California Health and Safety Code, the bill provides clarity that the federal statute intentionally leaves to the states. A non-renewal carried out in accordance with the bill’s requirements would satisfy the good cause standard under state law and, by extension, would not violate the extended use commitment under IRC §42(h)(6).
It is also important to distinguish between eviction and lease non-renewal. An eviction is a legal process that ends a tenancy during a lease term, usually for nonpayment of rent or significant lease violations. In contrast, non-renewal is the choice not to extend or renew a lease once it naturally expires. The federal law covers both—prohibiting "the eviction or the termination of tenancy" without good cause—but the practical and legal consequences are different.
AB 2689 focuses solely on non-renewal and does not create new grounds for mid-lease eviction. The bill allows an owner to refuse to renew a lease at its end when the legal conditions are met, offering a balanced approach that respects both the tenant’s right to stay during the lease and the owner’s interest in keeping the property affordable for income-qualifying households.
The policy logic behind AB 2689 highlights a long-standing tension in the LIHTC program: what occurs when a resident’s income exceeds the qualifying thresholds? Under current federal law, an over-income household in a LIHTC property can continue occupying its unit indefinitely. IRC §42(g)(2)(D) states that a household whose income surpasses 140% of the applicable income limit does not trigger a noncompliance event as long as the next available, comparable or smaller unit in the building is rented to a qualifying household (the "Next Available Unit Rule"). There is no federal requirement for the over-income household to vacate.
In a fully affordable property—where 100% of units are restricted—this can pose a practical challenge. Every unit occupied by an over-income household is a unit that could have been available to a household eligible for the affordable housing the property was intended and financed to provide. AB 2689 aims to address this by offering owners a carefully limited tool to facilitate turnover, but only when the household’s income has significantly and persistently exceeded the qualifying threshold, and the household can reasonably access market-rate housing.
If AB 2689 is enacted, owners and managers of 100% affordable LIHTC properties in California should consider the following:
Documentation is essential. The bill requires income to exceed 140% of AMI for two consecutive years. This means that annual recertification records must be carefully maintained, and management should be prepared to demonstrate the two-year pattern through certified income documentation.
FMR verification must be done promptly. The second part of the test—that 30% of the household’s monthly income exceeds the county FMR—requires referencing the applicable FMR at the time of the non-renewal decision. Owners should verify they are using the latest FMR published by HUD for the relevant county.
State and local tenant protection laws still apply. AB 2689 defines good cause for the extended use commitment, but it does not override other California or local tenant protection statutes, including the Tenant Protection Act of 2019 (AB 1482). Owners must ensure they comply with all applicable notice requirements and just-cause standards under state and local law.
HFA guidance may follow. If the bill becomes law, the California Tax Credit Allocation Committee (CTCAC) and other state agencies might issue implementing guidance or update regulatory agreement templates. Owners should watch CTCAC communications for any additional requirements or procedures.
AB 2689 was introduced on February 20, 2026, and amended in the Assembly on March 19, 2026, and again on April 6, 2026. As of now, the bill is pending in the California Assembly. All stakeholders in the California LIHTC industry should monitor its progress through the legislative process.
AB 2689 offers a precise, targeted legislative response to a long-standing practical issue in the LIHTC program. By establishing clear grounds for lease non-renewal in fully affordable properties, the bill remains consistent with the framework set by Congress, which left the term "good cause" to state law. It does not conflict with IRC §42 or the federal extended-use commitment; rather, it addresses a gap the federal statute intentionally created.
For owners and managers of 100% affordable LIHTC properties in California, the bill—if enacted—would establish a clear, documented process to address over-income occupancy, with meaningful safeguards for the affected households. We will continue to monitor AB 2689 as it progresses through the California Legislature and will provide updates as needed.
This article is provided for informational purposes only and does not constitute legal or tax advice. Owners, managers, and investors should consult with qualified legal counsel regarding the application of AB 2689 to specific properties and circumstances.
© 2026 A.J. Johnson Consulting Services, Inc. All rights reserved.
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