For years, our country has been faced with a housing affordability crisis that has seemed to worsen each year. In fact, as of the end of last year, nearly 50 percent of all renters are considered cost-burdened by their monthly rent payments.
While the low-income tax credit (LIHTC) program has historically been very successful in creating affordable housing across the country, there are certain constraints that limit the total number of units that can be created each year. However, recent changes arising from the One Big Beautiful Bill Act (OBBBA) have relaxed a few of those restrictions. To understand the effect of these changes, we must first understand the prior rules.
A Brief History of LIHTC
The LIHTC program is governed by Section 42 of the Internal Revenue Code of 1986, however, the housing finance agency (HFA) of each state ultimately administers the LIHTC program for projects within their respective state. The LIHTC is a federal credit that is recognized over a 10-year period and can be used by a taxpayer against its federal tax liability.
The annual amount of the LIHTCs available for a particular project is calculated by multiplying the depreciable basis of the property by the portion of the project reserved for low-income tenants to determine a project’s eligible basis. The eligible basis is then multiplied by the applicable credit percentage. Pursuant to the code, there are two potential applicable credit percentages: 4 and 9 percent.
Each year, every state is allocated a specific amount of 9 percent LIHTCs based on the state’s population. To obtain an award of 9 percent LIHTC, a developer will undergo a competitive application process through the state’s HFA, which will score the project based on specific attributes of the project and how well it aligns with the state’s preferences and priorities for housing.
These preferences are published in the qualified allocation plan for each state, which is typically updated every one or two years. Since the amount of 9 percent LIHTCs is a function of population (there is a specific dollar threshold available for each resident of the state), states with lower populations receive smaller awards, which ultimately equates to fewer deals than higher-population state.
Unlike the 9 percent LIHTC, the 4percent LIHTC is not subject to each state’s pool of LIHTCs; however, to qualify for the 4 percent LIHTC, it was previously required that more than 50 percent of the basis in land and improvements for each building in a project be financed with the proceeds of tax-exempt bonds (also known as the 50 percent test).
While the application process for the 4 percent LIHTC is not technically a competitive process, each state has a limited amount of tax-exempt bonds that can be issued in a particular year, which means the number of projects that can receive awards is inherently limited. However, certain limitations on the LIHTC program were loosened by the passage of OBBBA.
What the OBBBA Changes
On July 4, 2025, the OBBBA was signed into law and changed the LIHTC program forever. Among the changes to the LIHTC program were a permanent 12 percent increase in the annual allocation amounts of 9 percent LIHTC to the state and a reduction of the 50 percent test to a new 25 percent test. Due to the way that the annual amount of LIHTC is calculated, it seems likely that we will see a 12 percent increase in 9 percent LIHTC deals each year, which are typically awarded to new construction projects.
Therefore, we should see significant new supply across the country. The larger impact lies with the reduction of the 50 percent requirement to 25 percent.
In recent years, many states have fully used their available volume cap, and many have even over committed their funding capacity. Therefore, if states adhere to the new, lower threshold of 25 percent for each project, then each state could potentially fund twice as many projects and potentially create twice as many affordable units annually.
However, there are practical realities that developers must face. Specifically, the cost of tax-exempt debt is cheaper than taxable debt, which means each project will likely have the debt portion of their capital stack sized lower than expected. So how can developers fill the gap in their development budget? The answer is simple: More equity.
Bonus Depreciation Could Help Pricing
While it may seem unlikely that an investor would be willing to provide better equity pricing when investor returns have already been trending downward in recent quarters, OBBBA may have provided the solution.
Specifically, OBBBA, in addition to the changes to the LIHTC program discussed above, also reinstated into the tax code the 100 percent bonus depreciation for certain properties acquired and placed in service after Jan. 19, 2025, which means that investors can claim more losses earlier and therefore increase their yields. This could potentially lead to increased equity pricing.
It is no secret that we are in the midst of a nationwide housing crisis, and congress passed OBBBA in part to help address such crises. OBBBA amended several provisions of the code that impact the LIHTC program. These changes should ultimately lead to more affordable units being created for the foreseeable future across the country by increasing the availability of 9 percent LIHTC deals, essentially doubling the capacity of the 4 percent LIHTC program, and reinstating bonus depreciation to help investors achieve their desired yield targets at higher equity prices.
Brad Butler is Brad is a partner in the commercial finance practice group and co-chair of the multifamily housing industry sub-team with Frost Brown Todd LLP.