AFTER A YEAR of negotiations, the city of San Rafael has decided not to support a nonprofit housing arrangement with the Tesseract Capital Group, a San Francisco-based private equity firm that owns an apartment building located in the heart of the city’s Canal neighborhood.
The Canal is home to a tight community of about 16,000 people, mostly low-income Latino renters. When Tesseract acquired the 99-unit apartment building at 400 Canal St. in 2022, it soon began delivering “buy-out” letters to tenants, eventually evicting some families for renovations. In many of those cases, the tenants demanded and won their right to return, but they came back to higher rents and utility fees. The residents formed a tenants’ union.
Because the building is occupied by a vulnerable low-income population, the city sought a means of protecting them by converting several of the apartments into affordable housing units through a program offered by the California Municipal Finance Authority, a joint powers authority of member local government agencies, nonprofits and businesses.
“This is a program that the city of San Rafael proposed about a year ago to the tenants in a meeting where they were talking about tenant protections,” said Ethan Strull with Legal Aid of Marin, a nonprofit legal services organization.
Tesseract agreed to apply to CMFA for qualification through their Charitable Affordable Housing Program, which enables any market-rate developer to convert 40% of its lower-income units into affordable housing units. Tenant rental rates would be lowered or capped to a rate based on 80% of area median income.
Tesseract would receive an exemption on all property taxes related to the land and improvements, according to the Marin County Tax Assessor’s office, which said the property is currently assessed at $3.7 million.
The next step for Tesseract was to convince enough tenants to sign on. If enough tenants commit to a new lease, and if the company meets other requirements, the city could then approve the deal. But last week, the city notified the 400 Canal tenants’ union that the deal is off.
Tenants push for concessions
For months, the 400 Canal tenants’ union has asked Tesseract to amend the lease agreement to include limits on rent increases, protections for nonparticipating units, temporary relocation protections during repairs, and just cause eviction protections.
“At the last tenant meeting we attended on May 13, 2025, the union requested reduced rent caps below the program’s 80% average median income limits for Marin County (50% AMI to be specific),” said Derek Flores, Tesseract Capital Group’s president of development and construction in a June 6 email to the tenants’ union. “At the time, I shared that such reductions were unfortunately not feasible. You’ve since indicated that this is a key reason for non-consent to the proposed affordable conversion.”
According to Flores’ email, 53 of the households in the building could qualify for rent reductions averaging a reduction in rent of $185 a month.
The biggest point of contention was that Tesseract wanted a deal that limits rental rates to 80% of area median income, which are the terms offered by the California Municipal Finance Authority’s plan. The area median income for a family of four in Marin County is $185,700, which is much more than the household earning of low-income residents.
“Any kind of housing programs that are based on reduction in taxes, is actually very expensive,” said Leah Simon-Weisberg with the nonprofit housing advocacy group California Center for Movement Legal Services. “The developers get to pay way less taxes, which means the city has less money, and it has not been shown that this is effective. And there is a very checkered past when it comes to for-profit companies doing this. I don’t think 80% of AMI really constitutes low-income housing.”
Simon-Weisberg said her organization does not support the CMFA program going to for-profit developers because they often are able to raise the rent and the deal takes them out of obligations to offer tenant protections. She said her legal organization has opposed CMFA contracts with developers in other cities.
“The owners gave three-day notices to tenants that were behind on rent. They were offering to waive part of the rent if they signed on. The tenants’ union saw that as intimidation.” Ethan Strull, Legal Aid of Marin
“They’re just transactional,” she said, referring to organizations like CMFA that arrange nonprofit agreements. “It’s almost like they are just holding companies. There’s a bunch of these kinds of companies in the Central Valley, but they don’t own anything there. They’re just moving millions and millions and millions of dollars of tax credits.”
At 400 Canal, the tenant-landlord tensions escalated as Tesseract needed to secure the commitments of at least 40% of the households in order to meet qualifications for the CMFA program.
“The owners gave three-day notices to tenants that were behind on rent,” said Strull. “They were offering to waive part of the rent if they signed on. The tenants’ union saw that as intimidation.”
In a rare public protest on July 18, the tenants’ union rallied in the courtyard of the complex and together delivered their terms to the manager’s office. On July 28, representatives from Tesseract negotiated with the tenants through a mediator, but they did not agree on new terms. With the deal ending last week, the building remains market-rate apartments.
Bay Area Housing Finance Authority
The 400 Canal tenants’ union had modeled their amendment requests on many of the terms found in a regional plan called the Welfare Tax Exemption Preservation Program. It is administered by the Bay Area Housing Finance Authority via the regional government planning agency Metropolitan Transportation Commission.
“Our statute gives us a mandate across what are called the three Ps of housing,” said Daniel Saver, deputy director of housing and energy for the MTC. “That’s producing new affordable homes, preserving our existing homes that are affordable, and protecting residents from displacement.”
The BAHFA program also offers similar tax exemptions for developers wanting to convert units into nonprofit housing.
“There’s a whole bunch of ways that our program is different from theirs,” said Saver, referring to the CMFA program. “There’s a variety of terms that are focused on ensuring that any project that is taking advantage of our program is providing sufficient public benefits to outweigh any of the lost property tax revenue.”
Terms include protecting the existing residents, ensuring long-term affordability and ensuring a discount to market rents, adding that even rents that are 80% of AMI in some neighborhoods are still essentially market rate.
“Ours requires a 10% discount from market rate,” he said. “Whatever the market is, it would need to be below 80% of AMI. But then we would require there to be a 10% discount on that.”
Is the BAHFA program considered an alternative for 400 Canal St.? “What I do know is that we have communicated to the city and the property owner that we are more than happy to talk to them about our program,” said Saver. “We can’t force anyone into our program. Our program is more stringent in requiring sufficient public benefit. For that reason, some developers may not like it as much.”
Strull said the city of San Rafael and the tenants at 400 Canal were both interested in the Bay Area Housing Finance Authority model, but Tesseract was not.
“The owner had quite clearly stated that they’re not willing to do the BAHFA program,” said Strull. “They’ve shared that it would affect their bottom line too much.”
This story was updated at 1:18 p.m. on Monday, Aug. 18, 2025.