LIHTC Investors Gear Up for Expanded Credits

As January 1 approaches, affordable housing investors are speculating how changes to the Low Income Housing Tax Credit (LIHTC) program embedded in the One Big Beautiful Bill Act (H.R. 1) will play out on the street. Will the permanent 12 percent increase in nine percent LIHTC allocations precipitously drive down the price of those credits? Will four percent deals increase dramatically with the lowering of the private activity bond requirement to 25 percent?

Several syndicators spoke with Tax Credit Advisor about the looming changes and say impacts would likely be felt differently across the country depending on local regulations and regional LIHTC competition. On the whole, however, our experts agreed that changes will ultimately be absorbed by the wider market — although perhaps after some initial hiccups. Once successfully integrated, there is general consensus amongst analysts that the LIHTC expansion should help increase affordable housing throughout the nation.

“We anticipate that within 18 to 24 months the increased tax credit availability will be fully absorbed by the market, ultimately having the benefit of increased unit production to help fight the affordability crisis that the country is facing,” says Matthew Reilein, president and chief executive officer of National Equity Fund (NEF). “That’s not to say that there aren’t going to be bumps along the road between now and when the market finds its equilibrium.”

Four and Nine Percent Credit Deals Impacted Differently
H.R. 1 contains an explicit 12 percent increase in the nine percent credit, which will likely get absorbed into the market naturally,” says John Jablonsky, senior vice president, head of investor relations at NEF. “There are significant under-allocated nine percent deals out there and we expect those nine percent credits are going to get added to many of the existing deals as gap fillers or to deals that are currently applying for nine percent allocations in tight markets.”

This quick absorption will increase the supply of nine percent credits offered in the investor market, and may result in an immediate — albeit relatively modest — decrease in tax credit pricing.

Additionally, syndicators predict a concurrent increase in four percent credits — by as much as 30 percent — since the lowered bond threshold requirement will pave the way for additional four percent deals to qualify. The increase in the new deals will vary by state, as not all states have reached their bond cap.

“It’s going to be pretty staged,” says Jablonsky. “We feel it will take 18 to 24 months for these new four percent credits to roll out based on which states have hit their bond cap already.” This slower rollout is “giving investors a lot of comfort,” he says, since a large amount of newly available four percent credits are unlikely to flood the market.

Jablonsky says states that have hit their bond cap could be allocating additional four percent credits soon after January 1. But for states that haven’t hit their bond cap under the 50 percent test, there isn’t a clear path to benefitting from the new 25 percent test. Individual state regulations also will play a role since states will have to revisit internal legislative policy in order effectively manage the transition. (For a guide to the upcoming patchwork of state regulation surrounding the new 25 percent test, visit NH&RA’s resource map.)

An Already Soft Market
The expected dip in tax credit pricing due to increased supply will come to a market already experiencing some softening due to wary investors, says Todd Crow, chief executive officer of PNC Multifamily Capital.

“In the months leading up to the passage of the One Big Beautiful Bill we saw pricing decline just a little bit. I think that was largely anticipatory,” Crow says. “But it doesn’t feel like we are in any kind of free fall or rapid decline. There is still very strong investor demand. I would describe it as a modest reduction in pricing over the last six months.”

Dan Cooper, senior vice president and head of investor relations at Enterprise Community Partners’ housing credit investments business, concurs, estimating that credit pricing has declined nationally about three to five cents in the past six months. “I expect that trend to continue in the near term,” he says.

Still, there is general optimism about the long-term, resilient investor appetite for LIHTCs. Crow attributes this to the “fairly deep pool of investors” attracted to the social responsibility of investing in affordable housing as well as ongoing Community Reinvestment Act requirements that incentivize banks’ LIHTC investments. Additionally, the looming disappearance of various clean energy tax credits may boost demand for LIHTC.

Still, to build even more strength in the market, Crow says the industry will have to “lessen dependence on financial institutions.” Emphasizing the benefits of a diverse pool of investors, he says “it would be healthy for our industry to see high tech or consumer products or some other types of industry play a larger role.”

Industry Must Adapt to Meet Demand
Pricing dynamics aside, there is general consensus that these upcoming LIHTC changes will add to the ongoing growth of LIHTC deals. This may cause issues for states where limited staffing at Housing Finance Agencies (HFAs) and spotty availability of soft funds can present issues at closing. “More deals will be competing for the same amount of investor equity and more deals will need to get through HFAs,” Cooper says. “Those HFAs are often labor constrained. It’s possible they may need to increase capacity to process what might be fifty percent more deals through the system. And do they have the soft funds necessary to provide the subsidy that allows these projects to pencil?”

Cooper emphasizes that these local nuances will have an outsize effect on the future of the tax credit market. “Big picture, it’s easy to make broad statements about the bill’s impact, but it will come down to individual states’ implementation plans, availability of soft financing, and labor to process more deals through HFAs,” he says.

It is not just HFAs that will feel the staffing squeeze. As more tax credits come online and more deals emerge, syndicators say their own firms will likely need more staff to handle the influx.

“The size of the LIHTC asset class has been increasing for years,” explains Crow. “As that has happened, syndicates of investors have become larger. To the extent that we are going to see a 20 or 30 percent — or whatever the number ends up being — increase in credits, companies are going to have to continue to expand. We are expanding right now, adding to staff. We are processing quite a bit more business than we have historically.”

Crow adds that it’s not just staff increases — deals have become “increasingly complex,” causing syndicators to invest in additional specialized expertise. “We’ve seen significant increase in the number of state tax credit programs,” he says. “We’ve seen the need for additional funding as transactions have become more expensive as construction costs, land prices and labor costs have gone up. These have put stress on the development budgets for these projects which have been filled with soft financing, grants or other types of subsidies in a tax credit transaction.”

Rather than being daunted by these changes, NEF’s Reilein says that there is an eagerness to “evolve to meet the moment” that coming changes will bring. “With such a dramatic change in the overall size of the market, we also are excited by the fact that we don’t know exactly what it is going to look like in 24 or 36 months,” he says. “It’s going to be a dynamic period of piloting and pivoting, trying new things, working with new partners and going deeper with our existing partners to see how the market reshapes.”