By Kamara Green and Ben Nichols
With the enactment of the One Big Beautiful Bill Act, affordable housing experts are now assessing how to best leverage its many provisions to address America’s housing shortage.
Included within its pages is an improvement to one of the most important affordable housing tools, a $16 billion expansion of the Low-Income Housing Tax Credit (LIHTC), as well as other provisions that could help provide additional resources, facilitating a significant increase in the number of decent, affordable rental homes for families, seniors, people with disabilities and those living in rural communities where it is often more difficult to make development financing work.
LIHTC has already helped create more than 4 million new homes since the program’s inception in 1986, and it is the primary tool in producing and preserving affordable rental housing. The historic increase in LIHTC, which is scheduled to take effect next year, includes a permanent 12 percent increase in 9 percent LIHTC allocation, as well as the permanent lowering of the threshold for LIHTC projects financed with private activity bonds (PABs) from 50 percent to 25 percent.
The LIHTC program provides the authority for state housing finance agencies (HFAs) to determine the best approach for allocating tax credits based on their state-specific affordable housing needs and policies. This means HFAs will have more 9 percent credits, which provide more equity to a deal, making it easier to provide housing for residents at lower percentages of area median income (AMI). The increase in tax credits also could favorably impact rural communities, where incomes are lower, and projects may cost more to develop because they tend to be built at a smaller scale.
Even with the LIHTC expansion, the majority of projects rely on additional federal and state subsidies to pencil out. These sources of capital are often required to make the deals work, but they also can contribute additional complexity, time and costs.
The most significant change for many states is the bond financing test, which historically mandated that 50 percent of a project’s costs be provided by PABs to qualify for 4 percent LIHTCs. Lowering the requirement from 50 to 25 percent is a great strategy for states that are oversubscribed on their bond volume cap because it creates the opportunity to fund more units with tax-exempt bonds each year.
These changes will impact every housing asset that utilizes LIHTCs for development, including seniors housing. While it is rare that independent living, assisted living, memory care or skilled nursing projects would have a LIHTC component, any deal that does make use of tax credits will benefit from the flexibility that these changes to the bond financing test bring.
Changes Likely to Greenlight More Deals, But Hurdles Remain
While these provisions will have a major impact on the industry — it is estimated that the changes could result in the construction of 1.2 million additional affordable rental units over the next decade — there are still some challenges that remain. By lowering the bond threshold test on 4 percent LIHTC deals, more debt will be at taxable levels, resulting in less overall debt proceeds.
We are also underscoring that the 25 percent test is a floor, not a requirement, meaning that states have the ability to provide more if needed for financial feasibility, especially a handful of states that currently have excess bond capacity. At this early stage, HFAs are still planning their next moves. Some are looking to combine the 25 percent test with recycled bonds while others are pivoting to 25 percent immediately. Flexibility is the key.
There are also some potential hurdles with the new influx of tax credits. Extra credits could cause fluctuations in demand that lead to lower credit pricing and therefore less equity per deal. However, we expect this decrease to be lessened by Fannie and Freddie’s increases in LIHTC equity investment. There are also other policy levers that LIHTC advocates are pulling to increase investor interest in the program.
Even with the LIHTC expansion, the majority of projects rely on additional federal and state subsidies to pencil out. These sources of capital are often required to make the deals work, but they also can contribute additional complexity, time and costs. Unfortunately, even if we were able to deal with those issues, expectations of more federal gap financing becoming available are low, with the U.S. House of Representatives’ proposed fiscal year 2026 appropriation bills proposing to cut or eliminate several critical gap financing sources. (The House proposal eliminates tools that could fill in LIHTC gaps, such as funding for the HOME Investment Partnerships Program and Community Development Block Grants, for example.)
Developers Must Work With States to Maximize Best Results
It’s essential to understand that the new policies are not cure-alls but rather a key part of the solution to our affordable housing crisis. Providing added flexibility to developers and HFAs could well prove crucial in the coming years. We, as the developers, bankers, advisors and other stakeholders in the affordable housing ecosystem, need to support HFAs to ensure meaningful results.
Developers should ask themselves: How do we help HFAs get as many deals done as possible? What are the best ways to maximize the number of units with the additional 9 percent LIHTC available? At what percentage of costs should the bond financing test be set to maximize deals? Priorities for HFAs will vary from state to state, but it is essential that all of us do what we can to support them so these changes can have the biggest possible impact.
And to Congress: If we want to fully leverage this historic investment in LIHTC, funding for critical HUD and other federal financing must be maintained — if not increased — due to inflation and the drastically increasing materials and labor costs.
We must all work together to explore ways to lower regulatory barriers and requirements that will help bring the cost of production down if we truly want to create enough affordable housing to meet demand in urban neighborhoods, suburban communities and rural towns alike. The opportunity is there, but there’s lots to do in the months and years ahead.
Kamara Green is the national director of affordable housing production, and Ben Nichols is director of affordable operations at BWE.