25% LIHTC Test
So we're entering into a 25% LIHTC test world starting 1/1/2026 post the Big Beautiful Bill passing. Does anyone have any thoughts on how the industry will change? I work at a lender now and like my job, but will developers be hiring like crazy in places where volume cap was previously scarce? Will lenders/investors be able to keep up with projects? Will tax credit pricing change dramatically?
Is the LIHTC space a significantly better place to be than before?
The introduction of a 25% LIHTC test starting in 2026 could significantly impact the industry in several ways. Based on the most helpful WSO content, here are some insights:
Developer Hiring in High-Demand Areas:
If the 25% test increases the availability of credits in areas where volume caps were previously scarce, developers in those regions may ramp up hiring to handle the increased project volume. Historically, LIHTC developers have been opportunistic, especially during periods of policy changes or economic shifts, so this could lead to a surge in demand for experienced professionals in the space.
Lender and Investor Capacity:
Lenders and investors may face challenges keeping up with the increased project volume. The LIHTC space already requires specialized knowledge, and scaling up to meet demand could strain resources. Syndicators and investors might need to expand their teams or streamline processes to handle the influx of deals.
Tax Credit Pricing:
Tax credit pricing could see some shifts. While the context doesn't provide a direct precedent for a 25% test, historical data suggests that pricing can fluctuate based on market conditions, demand for credits, and investor appetite. For instance, during recessions or policy changes, LIHTC pricing has shown volatility. The increased availability of credits might lead to a slight dip in pricing, but this would depend on how much demand grows in tandem.
Attractiveness of the LIHTC Space:
The LIHTC space has been described as a relatively stable and profitable market compared to market-rate housing, especially during economic downturns. With the 25% test potentially expanding opportunities, the space could become even more attractive for developers, lenders, and investors. However, the complexity of LIHTC financing and compliance means that expertise will remain a critical factor for success.
In summary, the 25% LIHTC test could lead to increased activity and hiring in the industry, particularly in areas with previously limited volume caps. Lenders and investors may need to adapt to the higher project volume, and while tax credit pricing might adjust, the LIHTC space is likely to remain a strong and stable sector for those with the necessary expertise.
Sources: LIHTC during the next recession, Q&A: Affordable Housing Acquisitions, Economics of building affordable housing?
bump
Lowering the threshold to 25% does not inherently increase volume cap. All it will do is allow tax credits to be leveraged more effectively. That's important and should be helpful, but isn't transformative for the industry.
People will not be "hiring like crazy". In fact I imagine a slowdown. For every hypothetical additional unit the BBB creates because of the 25% test, it'll constrain at least twice as many by hamstringing HUD. The bottleneck is approvals, not funding.
What about areas like NYC where most open projects don't really rely on HUD except for SARA/senior projects? Wouldn't it effectively double the production in places like this?
I'm based in NYC. Money is not the issue, or not usually. Most of the developers I know have pipeline for years - it's getting HUD/DOB approval or through City Council/community boards that causes delays.
And again, even if all that got solved, the actual allocation of credits is not changing, or not that I had heard (with the exception of the substantial boost in 9% credits, but those are a tiny, tiny fraction of the affordable market). Yes, the 25% test will allow more projects to get done, but probably not double.
A better way to think about it, at least at a high level, is how financeable are these projects in the first place? If you think that dropping the qualified costs test from 50% to 25% will double production, then you are basically making an assumption that the project can support an additional 25% more debt. I guess there are probably areas where the market rents and 60% of AMI are about the same, and thus maybe you can take on more construction debt... but at the end of the day you've got to repay al that private debt at stabilization, ya know? Right now on my projects, LIHTC equity makes up about 40% of the permanent capital stack. If my bonds cover 25% of the capital stack, I've got another 35% to go. That's either private debt, which my affordable housing project probably cannot repay, or subsidy, which few municipalities are in a position to dole out in sufficient amounts.
What seems more likely to me is that we start seeing projects that meet a 40% or 45% test, essentially. That's a big deal, in the scheme of things, if you're freeing up 10-20% of LIHTC capacity for new projects. It's why the industry has been advocating for this for years. It's meaningful, but I wouldn't say transformational, and given the timeline these projects face (among other hurdles) I wouldn't expect to see a massive hiring spree any time soon. Plenty of other macro factors might offset these gains, and no developer is going to increase their overhead by 10-20% today on the hope that their pipeline will grow accordingly in 2-5 years.
Interested to hear from others in the space as well if this is as game changing as they're making it sound
Bottom line I'm seeing is that lowering the 50% test to 25% has made it harder for affordable projects to close the financing gap.
Lowering the bond-financing test from 50% to 25% allows states to spread limited tax-exempt bond authority across more affordable housing projects. However, where states reduce access to low-cost permanent debt (i.e., limit tax-exempt bonds to no more than 30% of aggregate basis), projects will likely face larger financing gaps.
The effect depends on state policy (i.e., Are tax-exempt bonds limited to 30% of aggregate basis or are projects allowed to get up to 50%?) and available replacement financing. Higher-cost replacement debt is typically taxable loans at higher interest and therefore, projects are more likely under the 25% test to have a funding gap.
The result is more gap funds or grants or low-interest soft loans are needed. Which, as Ozymandias points out, difficult for many local and state governments to do. The amount of debt affordable projects can take on is tied to maximum rents that are set by HUD and what the project developer determines is feasible for the area/project.
It's entirely state dependent. My current taxable debt is cheaper than my tax exempt debt, factoring in all servicing and issuance fees. The true negative of the 25% test is the demand for the credits, just too much supply in the market to get competitive pricing.
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