Navigating the New 4% LIHTC Capital Stack

Most deal teams already know the headline: the One Big Beautiful Bill Act permanently added a new pathway allowing qualifying 4% Low-Income Housing Tax Credit developments to satisfy the tax-exempt bond requirement at 25% of aggregate basis rather than the traditional 50%, applicable to buildings placed in service in taxable years beginning after December 31, 2025. Qualifying tax-exempt obligations must finance at least 25% of the building and land's aggregate basis, with bonds from one or more issues dated after that date financing at least 5% of that basis.

That is a meaningful change, but it does not mean every project should issue the minimum; the better question is how much tax-exempt bond financing makes sense once the federal requirement, state policy, financing costs, and supportable debt are considered together.

Historically, a 4% LIHTC transaction generally needed qualifying bond proceeds equal to at least 50% of aggregate basis, which in some transactions required a larger bond issue than the property intended to retain as permanent debt.

The new pathway separates two questions:

Those amounts may differ, and the practical benefit varies by market, as discussed further below.

The distinction between aggregate basis and eligible basis frequently creates confusion in 4% LIHTC transactions. The 25% test is measured against aggregate basis, which includes building costs and land, while LIHTC equity is calculated using eligible basis, which excludes land and certain other costs. Because the two use different measurements, development teams should avoid substituting one for the other when evaluating compliance, since a project may satisfy one calculation while producing a different result under the other.

The reduced threshold allows a project to qualify with less volume-cap bond financing, but it does not require borrowing less or automatically reduce the financing gap. Tax-exempt debt often carries a lower rate than taxable financing, so replacing it with taxable debt can offset the expected savings through added interest cost.

The property's supportable permanent debt therefore matters: if operations can support tax-exempt debt above the federal minimum, limiting the issue to approximately 25% may not be the most economical structure. A team may instead issue bonds near the minimum, size them around supportable debt, or use a larger construction-period issue partially repaid at conversion, since the right structure depends on the project rather than the statutory percentage alone.

Lowering the threshold does not eliminate the cost or complexity of issuing bonds, which may include issuer fees, bond counsel, borrower's counsel, purchaser and underwriter costs, trustee fees, tax and arbitrage analysis, placement expenses, and compliance requirements, many of which are fixed regardless of issuance size. This matters most for smaller developments, where the equity and rate benefit must still justify those costs. Some issuance costs may qualify for inclusion in eligible basis depending on the facts, but that does not eliminate the cash cost of the transaction.

Assume a development has $18 million of aggregate land-and-building basis. Under the former 50% test, it needed at least $9 million of qualifying bond financing. Under the new 25% pathway, the federal minimum is $4.5 million, assuming the additional post-2025 issuance requirement is also satisfied.

If the property can support $7 million of permanent debt, it no longer needs a $9 million bond issue just to satisfy the former test, and the team can evaluate whether $4.5 million, $7 million, or another amount produces the best execution. The change does not alter the amount of LIHTC equity or eliminate the remaining financing need; it simply gives more flexibility in structuring the debt portion of the capital stack.

Although the federal threshold is 25%, targeting exactly that amount may create unnecessary risk, since aggregate basis can shift during construction due to cost overruns, change orders, final developer fee calculations, and other cost adjustments, and bond proceeds must be properly spent on qualifying costs within the applicable period. In practice, teams should avoid sizing bonds precisely to the minimum, whether set by federal law, state allocation requirements, or transaction-specific underwriting, since a reasonable cushion protects against basis changes before final cost certification.

Some housing finance agencies build in a larger cushion through their own requirements, while others allow sizing closer to the federal minimum, so the flexibility available can vary by jurisdiction. The new law lowers the federal floor, but state allocation, lender, and transaction-specific requirements still apply, and bond sizing should be monitored throughout construction in consultation with bond counsel, tax counsel, lenders, and other advisors.

In Ohio and many Midwest markets, bond volume is often less constrained than in coastal markets that regularly exhaust annual allocations, so the practical benefit here is less about preserving volume cap and more about flexibility in how debt is structured and sized.

The new threshold may:

Those benefits must still be weighed against issuance costs, taxable borrowing rates, state underwriting requirements, and available gap financing.

The 25% test creates more flexibility, but it also makes careful modeling more important, since the federal minimum, state allocation policy, and the project's optimal financing structure may each produce a different bond amount. CSH works with developers, syndicators, lenders, and transaction counsel on 4% LIHTC structuring, aggregate-basis calculations, bond-test planning, cost certifications, pro forma modeling, and capital-stack analysis.

If a transaction required an oversized or inefficient bond execution under the former test, it may be worth modeling again: the right answer may not be exactly 25%, but the new threshold gives the team more room to find it.