One Big Beautiful Bill Act: LIHTC & Affordable Housing Developers

Affordable housing developers, syndicators, and investors are entering a different Low-Income Housing Tax Credit (LIHTC) environment than they were just a year ago. The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, made two permanent changes that affect how projects may be structured and financed beginning in 2026. Those changes are already being considered in allocation planning, underwriting, and project financing decisions.

The two primary LIHTC changes are a permanent 12% increase in the amount of 9% credits available to states and a reduction in the tax-exempt bond financing threshold for 4% credit projects from 50% to 25%. Together, these provisions may create additional opportunities for projects that may not have been feasible under the prior rules, but each project will still need to be evaluated based on its facts, financing sources, timing, and applicable state requirements.

Beginning in 2026, the OBBBA permanently increases each state's annual 9% LIHTC allocation by 12%. The increase applies to both the per-capita allocation and the small-state minimum.

The additional credits available to states may allow housing finance agencies to fund more projects. However, 9% credits will remain competitive, and each state's Qualified Allocation Plan (QAP), application requirements, and development priorities will continue to determine which projects receive awards. The increase may also affect the LIHTC equity market over time, although investor demand, Community Reinvestment Act considerations, interest rates, and other market conditions will continue to influence pricing.

The OBBBA also permanently reduces the tax-exempt bond financing threshold for 4% LIHTC projects from 50% to 25% of aggregate basis. The new threshold generally applies to buildings placed in service after December 31, 2025, provided that at least 5% of the aggregate basis of the building and land is financed with tax-exempt bonds issued after December 31, 2025.

This change may allow more projects to qualify for 4% credits without needing as much private activity bond financing. That may be especially helpful in states where bond volume is limited. It may also allow developers to revisit projects that could not meet the prior 50% test. However, reducing the amount of bond financing does not eliminate the need to identify other funding sources for the project, so developers will still need to consider conventional debt, soft funding, grants, or other financing sources.

Projects that qualify under the tax-exempt bond rules must still obtain Form 8609 from the appropriate housing credit agency. While the new rules may reduce the amount of bond financing needed to access 4% credits, they do not eliminate the compliance and documentation requirements associated with the LIHTC program.

While each provision is important on its own, the larger impact comes from how the changes may affect the overall affordable housing pipeline. The 12% increase gives states additional 9% credits to award, while the 25% bond test allows available private activity bond volume to support more 4% transactions.

That does not mean every project will automatically become feasible. Construction costs, operating assumptions, interest rates, equity pricing, local funding, and state-level implementation will continue to affect project viability. Still, developers now have more flexibility when evaluating whether a project is better suited for a competitive 9% allocation or a tax-exempt bond-financed 4% structure.

Developers should take another look at projects that were difficult to finance under the prior requirements, since a project that could not satisfy the former 50% bond test may be worth reviewing under the new 25% threshold. It's also worth reviewing placed-in-service and bond issuance timing, as the effective-date requirements matter, particularly for projects already in development or using bonds from more than one issuance. Keeping an eye on state-specific guidance matters too, since housing finance agencies may update QAPs, bond policies, application procedures, or underwriting standards in response to the law.

Beyond timing and eligibility, developers should review the project's overall financing structure, since a lower bond requirement may conserve bond volume, but the project must still identify the other funding sources needed to make it financially viable. Underwriting and equity assumptions deserve a fresh look as well, since credit pricing and investor demand can change, and current market assumptions should be used rather than relying on prior-year models.

These changes affect several parts of a LIHTC transaction, including bond sizing, eligible and aggregate basis calculations, equity projections, financing needs, and allocation strategy. CSH works with affordable housing developers, syndicators, investors, and not-for-profit sponsors to evaluate how the updated rules may apply to a specific project.

If you are reassessing a project that may not have worked under the prior rules, planning a future allocation application, or evaluating a 4% transaction under the updated bond test, connect with our CSH affordable housing team to discuss what the changes may mean for your project.