The
That was the upshot from panelists at The Bond Buyer's California Public Finance
"The expansion in tax credit, we view as positive, but it's a little bit of a Catch-22," said Karen Fitzgerald, a Fitch Ratings senior director. "One of the issues we are seeing is the idea behind expanding the tax credit program is to expand the supply and attract tax credit investors, but you are relying on demand from tax credit-equity investors, but that demand has fallen."
As a result, housing developers receive fewer dollars for each tax credit, Fitzgerald said.
"So while they qualify for more tax credits, they need more gap financing," she said. "So additional financing needs to be identified, whether it's loans or more grants," she said.
The Low Income Housing Tax Credit (LIHTC) is being expanded by the One Big Beautiful Bill Act (OBBBA), so that it will permanently increase 9% LIHTC allocations starting in 2026 and lower the percentage of a project that has to be financed using private-activity bond (PAB) financing to qualify for 4% LIHTC to 25% from 50% for properties placed in service after Dec, 31, 2025.
There are two pockets of tax credits that low-income housing can qualify for: the 9% pot and the 4% pot.
The 9% LIHTC is awarded through a competitive application process and typically covers about 70% of a project's eligible costs, generally for new construction and substantial rehabilitation. The 4% LIHTC is a non-competitive credit that is automatically provided for properties financed with tax-exempt bonds, typically covering about 30% of project costs for both new construction and the acquisition of existing buildings.
OBBBA estimated the provisions could generate more than 1.2 million in additional affordable rental homes between 2026 and 2035.
"There are deals coming in requesting bonds, but almost every deal is having issues," said Ben Barker, California Municipal Finance Authority's financial advisor. "We are going to get a lot more deals done, but the size of the deals will drop in half."
The price of the projects hasn't dropped in half, however; and unfortunately the cities and counties are already tapped out on soft funds to fill the gaps, Barker said. "What I didn't contemplate, is the drop in tax credit pricing."
Almost all of the "recycled bonds" are going into existing bond deals, Barker said, referring to the re-allocation of tax-exempt private-activity bond volume cap that would otherwise expire. Projects allowed to sell private-activity bonds have to issue debt within the calendar year, according to federal law, unless the California Debt Limit Allocation Committee, which oversees PAB allocations in the state, grants a carry forward; if a project falls off and the housing developer can't use them, CDLAC can reallocate or "recycle" them.
The California Housing Finance Agency (CalHFA) is developing a lending circle within the space, said Erwin Tam, director of financing for the organization.
"Taxable tails in recycled bonds is part of the collage," Tam said.
"The 25%
"It will be an ongoing challenge," Tam said. "The 25% test will have a knock-on effect."
During her keynote speech, California State Treasurer Fiona Ma said the combination of the $500 million in low-income tax credits Gov. Gavin Newsom included in the 2026-2027 budget and the change in the federal tax law has enabled the state to do more projects.
The $500 million allocated to further affordable housing "has helped jump-start many projects that were sitting on the shelves for years and to build more housing in rural communities," Ma said.
She told The Bond Buyer
