A Quick Guesstimate on the Proceeds Impact of Upcoming LIHTC Changes

As we all know, the One Big Beautiful Bill Act (H.R. 1) incorporates several major affordable housing industry goals by enacting changes to the Low Income Housing Tax Credit (LIHTC) program, set to take effect January 1, 2026. These include a permanent increase in the allocation of nine percent LIHTC allocations by 12 percent (indexed for inflation going forward), as well as a reduction of the 50 percent test to the 25 percent test, effectively halving the number of private activity bonds needed to qualify for four percent LIHTC. This is a far cry from where we thought we might be earlier in the year, when it appeared that the tax exemption on all municipal bonds or private activity bonds might be in jeopardy.

I think we all are correct in assuming that these Code revisions will certainly be a material help to the industry in producing more affordable multifamily rental units to serve the disturbingly increasing number of rent-burdened Americans. However, it is also widely assumed that since as much as half of the debt financing used in these transactions will need to bear interest at taxable versus tax-exempt rates, the blended interest rate which will be borne by the debt side of these deals will rise, and at least for the substantial majority of these financings which are debt service constrained, the available proceeds from the debt side of the capital stack will decline.

Similarly, it seems obvious that increasing the supply of nine percent LIHTC by 12 percent, as well as increasing the supply of four percent LIHTC by an unknown amount — which the equity buy side will have to absorb — will lower LIHTC pricing by some material amount (absent other developments increasing demand). Other aspects of H.R. 1 could further exacerbate this problem, but that is beyond the scope of this basic analysis.

Let’s make some assumptions and come up with some very general guesstimates of what the negative impact on proceeds might be.

Possible Adverse Impact on Debt-Side Proceeds
Let’s assume that on a typical financing the first deed of trust loan amount might be 60 or 65 percent of the total capital stack (i.e., total development cost) through conversion to stabilized occupancy, and then drop to perhaps 30 or 40 percent of the capital stack post-conversion once later installments of tax credit equity and subordinate loan proceeds become available. 

Pre-conversion Phase:
Let’s assume that during the pre-conversion phase, the first deed of trust debt will comprise 65 percent of the capital stack, and that a portion equal to 25 percent of the capital stack will bear tax-exempt variable rate during this period, and that a portion equal to 40 percent of the capital stack will bear interest at a taxable variable rate which is 100 basis points higher (though, in reality, many deals will carry more than 25 percent tax-exempt bonds, even in oversubscribed states).

If we are looking at a 36-month period to conversion, that’s an additional 100 basis points of interest expense on 45 percent of the capital stack — a gross amount of additional interest that will be payable equal to about 1.35 percent of total development cost. Let’s further assume that the project is placed in service at month 24, in which case 2/3 of this additional interest will be includable in the tax credit basis and thus the borrower will get back about 40 percent of this 2/3 of the additional interest in the form of additional 40 percent LIHTC syndication proceeds.

This leaves us with a about a one point negative hit to proceeds on the debt side of the deal with respect to the pre-conversion phase.

Post-conversion Phase:
Let’s now assume that post conversion the debt portion of the capital stack is paid down to a level of about 40 percent of our capital stack during the perm phase, as suggested above. Let’s further assume that the underwriting on the permanent debt uses a 40-year amortization (generally to a 17- or 18-year balloon). Let’s also assume that an amount of our perm debt equal to 15 percent of our capital stack is now taxable, and since there is more limited demand for taxable affordable multifamily rental housing debt than tax-exempt, the rate on that portion might be 100 basis points higher.

At current interest rates, if each eight basis points increase in the rate on a debt service constrained loan shrinks proceeds by about one point, we would have a shrinkage in proceeds of about 12.5 percent on the taxable portion of our permanent debt that would now bear taxable rates and which is 15 percent of our capital stack.  So, we have lost proceeds on the debt side of the financing relating to the perm debt equal to about two points.  Once again, this is just a rough guesstimate and will obviously vary substantially from deal to deal.

Added together, it looks like we have lost proceeds equal to about three percent of total development cost on the debt side.

Possible Adverse Impact on LIHTC Proceeds
Assessing the adverse impact of the substantial increase in the supply of LIHTCs without a comparable increase in demand is much more difficult. Elimination of some energy and solar tax credits may increase demand for LIHTC, but making new markets tax credits permanent may increase the supply of tax credits, lowering the demand for LIHTC.

This will probably take time to sort out. A number of recent articles have discussed downward pressure on tax credit equity pricing, and one recent article gave an overall estimate of about 83 cents, though once again this can vary dramatically from market to market and from transaction to transaction. Several respected colleagues with whom the author has discussed this potential aspect of H.R. 1 think we could see a drop of as much as five cents.

Let’s assume that the four percent LIHTC before H.R. 1 would have syndicated for about 40 percent of our total capital stack.  Let’s further assume that our project is in one of the roughly 30 states which have a state LIHTC program, and prior to H.R. 1 those credits would have syndicated for about ten percent of our total capital stack, and that the additional supply of those tax credits in the market would similarly depress state LIHTC pricing.  If we have lost five percent in pricing on LIHTC proceeds which account for 50 percent of our capital stack, it looks like a loss of another 2.5 percent of the overall proceeds needed to finance the project.  Once again, this could vary dramatically from state to state and from one financing to another.

Conclusion
So, it would appear that based on the very generalized assumptions and very rough calculations set forth above, we might guesstimate that once the markets adjust to dropping the 50 percent test to 25 percent, the likely of proceeds on a particular financing in a post-H.R. 1 world might be about five or six points.

Other recent developments may present additional challenges to the feasibility of affordable multifamily rental projects in the months and year ahead. These include the proposed $27 billion (43 percent) reduction in Section 8 portable vouchers and a scaling back of other HUD subsidies for affordable rental housing recently proposed by the Trump administration.

Still, it seems likely that these adverse impacts on proceeds will only partially offset the substantial potential major positive aspects of H.R. 1 in volume constrained states — but the emergence of this additional funding gap on a typical project will need to be taken into account and planned for by borrowers in advance.