The affordable housing industry is entering its cautious momentum era. On one hand, the One Big Beautiful Bill Act (OBBBA) significantly enhanced the Low-Income Housing Tax Credit (LIHTC), making more credits available and making the credits easier to qualify for. On the other hand, the parallel cuts to federal funding, general uncertainty in the market and a decline in investor interest keep the industry outlook guarded.
The tax credit is a powerful tool used by developers to aid in the construction and development of affordable housing projects across the country. Split in two categories, each of the 4 and 9 percent credit options provide advantages for differing financing structures, project sizes and construction options.
The 4 percent credits are generally used in projects availing themselves of tax-exempt bond financing, while the 9 percent credits are generally used in new construction and rehabilitation projects that do not use certain additional federal subsidies in their financing structure.
Developers are awarded the tax credits by state housing finance agencies and claim the credits over a 10-year period once the project is completed and available to be rented.
However, due to the need for front-loaded capital to complete construction, developers partner with third-party investors and exchange the 10-year stream of tax credits for accelerated equity financing, thereby reducing the necessary debt for the project. Other typical sources of financing include support from the Department of Housing and Urban Development (HUD), state offices of mental health and the developers themselves, who either loan proceeds into the projects or defer a portion of their developer fee to help with the initial construction costs — or sometimes a combination of both.
What’s Changed
Historically, in order for a developer to receive the 4 percent credit, at least 50 percent of the project needed to be financed using tax-exempt bonds. The OBBBA permanently reduces that threshold to 25 percent, which eases the qualification burden for these projects. The 9 percent credits are allocated to each state based on population. The OBBBA increased these allocations by 12 percent starting in 2026 with an aim to stimulate development by making more credit dollars available to developers.
While the changes to the 4 and 9 percent credits are designed to increase the available supply of credits for the affordable housing industry, developers still face hurdles, namely that increased construction costs and the uncertainty surrounding tariffs are having a direct impact on the ability to accurately budget for project costs.
Additionally, the OBBBA withdraws all uncommitted funds that were previously allocated to HUD’s Green and Resilient Retrofit Program (GRRP) through the Inflation Reduction Act. The GRRP was originally designed to support energy efficiency and climate-resilience upgrades in HUD-assisted multifamily housing. Without HUD funding, affordable housing developers need to look to other funding sources to close the gap.
In a similar vein, the increased supply of credits without a matching increased demand has caused equity investors to be more conservative in their pay-in rates for credits because most are uncertain about how the markets will adjust in the coming years. The combination of funding sources — in particular different types of tax credits, such as those in connection with the historic rehabilitation of buildings — is lessening the potential pool of interested investors. Developers now must balance the need for additional funds for their projects with keeping themselves open to maximum interest from investors.
Keri Curtis, managing member of New York-based affordable housing consultant company CSD Housing, recently shared concerns about the new legislation. “While the benefits of the One Big Beautiful Bill Act are encouraging, it remains a time of unprecedented challenges for the low-income housing development community,” she said.
“The softening of credit pricing, higher construction costs from COVID overhang and tariffs, uncertainty around interest costs and political unpredictability have developers cautious going into 2026 and seeking creative solutions.”
Developers Explore New Funding Streams
All that said, mission-oriented nonprofit developers, although cautious, are not currently being deterred. Developers are not only continuing with their current projects, they are also actively seeking sites for new projects in order to serve their communities. One avenue of success has developers partnering with mental health service providers to combine supportive and affordable units within one project. This affords developers diverse funding streams to ensure the projects make financial sense and gives not-for-profit service providers a space to serve their target populations.
These same themes were the center of conversation at the recent Upstate New York Affordable Housing Conference, held Sept. 12 in Buffalo, New York. Hundreds of industry partners came together to discuss the roadblocks they are facing and to brainstorm solutions. Conversations focused on the tenacity of the affordable housing industry and its determination to bring projects to fruition despite uncertainty.
The need for affordable housing remains high. As developers settle into the latest iteration of the affordable housing landscape, it will take collaboration among the entire industry to determine creative solutions to ensure projects continue to move forward.
Danielle Katz of Syracuse, New York-based law firm Barclay Damon concentrates on corporate and tax credit transactions. She can be reached at [email protected].