The 50% test has been the single biggest constraint on 4% LIHTC production for two decades. To qualify for 4% credits, a project had to finance at least 50% of its aggregate basis with private activity bonds. More than 20 states were at or near their annual bond volume cap. The 25% test changes the math entirely. A project that previously needed $10 million in bond financing to qualify now needs only $5 million. States can stretch their bond cap across twice as many projects.
But there is a catch. Reducing the bond requirement from 50% to 25% means each project has 25% less bond financing. That creates a gap. Options include recycled bonds, taxable tails, and supplemental soft financing. But for many projects, the gap will need to be filled by additional equity, deferred developer fees, or state and local subsidies that are already oversubscribed. The 25% test opens the door. But walking through it still requires a complete capital stack.
What Developers Should Do Right Now: Get your market study done NOW. Not next month. Every HFA scores on market demand, and the quality of your market study is the foundation of your application. Know your state's QAP changes. Missouri's 2026 QAP is published. Kansas released its 2026 QAP with a January 16 preliminary application deadline. Florida uses a rolling RFA process. Structure your deal before you apply. The 12% increase means more competition. Your financial feasibility analysis, your capital stack, your gap financing strategy, and your community engagement plan all need to be locked down before you submit.
If you are a lender or investor: The pipeline just got bigger. More projects will qualify. More developers will apply. Your deal flow is about to increase. CRA credit is available on every qualifying deal. The LIHTC expansion is a CRA opportunity for every bank with community development obligations.
The LIHTC expansion is real. The opportunity is historic. But opportunity without preparation is just noise. The developers who will capture this opportunity are the ones who have market studies completed before the rush, understand their state's QAP scoring priorities, have capital stacks structured for the new 25% bond reality, and have advisory relationships that can navigate the full ecosystem: tax credits, bonds, gap financing, zoning, community engagement, and HFA politics.
That is what The Nash Group does. We do not just build housing. We build the deals that make housing possible. 254 units built. $100M+ in development costs. 100% HFA acceptance rate on market studies. Former MHDC Vice Chairman. nashdg.com
