A major shift in affordable housing finance is underway—and it could unlock thousands of new homes across California. Thanks to federal legislation signed on July 4, 2025, the long-standing 50% test for accessing 4% Low-Income Housing Tax Credits (LIHTCs) has been reduced to 25%. This change is a game-changer for developers, but it also comes with new considerations.
Historically, affordable housing developments needed to finance at least 50% of their land and building costs with tax-exempt Private Activity Bonds (PABs) to qualify for 4% LIHTCs. This requirement often limited the number of projects that could move forward due to bond volume caps and the inability of low-income properties to support high levels of debt.
Under the new law, the threshold has been lowered to 25%, meaning developers can now qualify for 4% credits with significantly less bond financing. This change is expected to free up billions in bond cap and enable states like California to double the number of properties that can access LIHTC equity.
This change produces some real potential benefits for builders and developers but it also comes with some points to ponder. Here are some of the benefits we see:
More Projects Can Qualify – Lowering the threshold allows more developments to access 4% credits, especially those serving extremely low-income populations that can’t support large debt loads.
Freed-Up Bond Cap – California’s bond cap has been stretched thin. This change allows the same amount of LIHTC equity to be generated with fewer bonds, freeing up resources for other critical infrastructure and housing needs.
Reduced Financing Inefficiencies – Many projects previously had to refinance their bonds to reduce debt burdens. With the lower threshold, developers can avoid costly refinancing steps and streamline their capital stack.
Greater Reach to Vulnerable Populations – Projects serving seniors, people with disabilities, and formerly homeless individuals—who often generate less rental income—can now qualify more easily for LIHTC financing.
While these benefits are substantial, developers should be aware of a few challenges:
Strain on Recycled Bonds – With fewer new bonds being issued, recycled bonds will become more critical—and potentially harder to access
Need for Additional Funding Sources – Projects will need to fill larger financing gaps with other sources, such as soft loans, grants, or deferred developer fees.
Regulatory Adjustments Still in Progress – California’s Tax Credit Allocation Committee (CTCAC) and Debt Limit Allocation Committee (CDLAC) acted quickly and have released emergency regulations. Developers should monitor updates closely and build in cushions for cost overruns and feasibility reviews.
Tiebreaker Impacts – CDLAC’s competitive scoring system now favors projects that request bond allocations close to the 25% threshold. This could influence how developers size their requests and structure their applications.
So what’s next and what are the timelines? The new 25% test applies to properties placed in service after December 31, 2025. Developers would be wise to begin evaluating their portfolios now to determine which projects may benefit—and how to adjust their financing strategies accordingly.
CCAH will continue to advocate for clear, developer-friendly regulations and provide updates as CDLAC and CTCAC finalize their implementation plans.