REST Easy with Mahoney September 2025

Direct and Indirect Impacts to Low-Income Housing Tax Credit (LIHTC) Financing

There are two key inclusions in the OBBB Act that directly impact the availability of LIHTC’s for affordable housing developments. The first, and by far the most impactful in addressing critical affordable housing demand, is the permanent lowering of the 50% “financed-by” test for tax-exempt volume cap private activity bonds to 25%. This applies to projects applying for 4% LIHTC’s, where at least 25% (previously 50%) of the aggregate basis of the project (denominator = depreciable basis + land basis) must be financed by tax-exempt bonds (numerator). For example, under the new law, a project with $40M in aggregate basis would need at least $10M (25%) in tax-exempt bonds if closing on or after January 1, 2026, compared to $20M (50%) if closed prior to January 1, 2026. It’s important to note that this provision of the OBBB Act takes effect January 1, 2026, so some 4% deals currently in development that receive a supplemental 2026 a tax-exempt bond issuance could be tested under the new rules, depending on the amount of supplemental bonds issued. Section 70422(b)(1)(B) of the bill includes the following amendment to Section 42 regarding the “financed-by test” (summarized):

1. 50% or more of the aggregate basis of such building and the land on which the building is located is financed by 1 or more [tax-exempt bond] obligations OR
2. A) 25% or more of the aggregate basis of such building and the land on which the building is located is financed by 1 or more [tax-exempt bond] obligations AND B) 1 or more of such obligations: i) are part of an issue the issue date of which is after December 31, 2025, and ii) provide the financing for not less than 5 percent of the aggregate basis of such building and the land on which the building is located.

So, if a project has 2025 and prior issued bonds with a supplemental issuance in 2026, as long as the 2026 issuance accounts for at least 5% of aggregate basis, the project may utilize the 25% test as the pass/fail.

The capital markets equilibrium is widely impacted by the new 25% test, as individual 4% projects will require less volume cap bond supply, and allocating agencies will be able to theoretically double its deployment of bond allocations to meet affordable housing demand. This will be a clear boost to development in states such as Minnesota, where market data indicates an over-subscription to volume cap bond supply, i.e. there are more projects requesting bond allocations than there are available bonds to allocate. As of the date of this article, state allocating agencies are developing and codifying policies to implement the new 25% test. It is important to note that states have a degree of autonomy in how the new law will be implemented in their jurisdictions. In practice, many allocators have historically baked in an approximate 10% cushion on the financed-by test, e.g. 53% and 55% thresholds for MHFA and MMB bond allocations. MHFA is expected to publish their updated policy in the 4th Quarter 2025 as an amendment to the 2026-2027 QAP. The National Housing and Rehabilitation Association has posted a map detailing states’ policy plans to their website HERE.

The second direct impact of the OBBB Act involves 9% LIHTCs. The OBBB Act provides for a permanent 12% increase in the 9% allocations for LIHTC, beginning in calendar year 2026.

Developers should also be aware of 4 key OBBB Act laws that indirectly impact LIHTC project financing:

• First, it makes 100% bonus depreciation permanent, creating additional yield for investors and potentially increasing the available equity to the deal.
• Second, adjustments to Section 163(j) allows depreciation and amortization to be added back to adjusted taxable income, which may enable greater interest expense deductions without needing to elect a 30-year ADS depreciation life, offering greater flexibility to developers.
• Thirdly, and on a less positive note, Section 45L credits (for energy-efficient residential units) and 179D expensing (for commercial buildings) are being eliminated after June 30, 2026. Developers seeking to comply with green initiatives in their state QAP will need to seek alternative sources to fund these improvements going forward.
• Lastly, the investment tax credit for solar and wind projects is being phased out. Projects must begin construction by July 4, 2026, and be placed in service by Dec. 31, 2027, unless the continuity safe harbor is met.

Other Real Estate Industry Impacts from the OBBB Act

Notably the New Market Tax Credit and provisions for Opportunity Zones have been made permanent in the tax code.

Developers are encouraged to reach out to their CPAs to discuss projects and financing impacts considering the OBBB Act. The Mahoney Real Estate Team is happy to help navigate these new provisions and run scenarios to assist you with successfully closing and remaining compliant with the state allocating agency through 8609 and beyond.