The Changing 50% Test: A New Chapter for Affordable Housing Finance

At CSG Advisors, we closely follow policies and proposals that could reshape the way affordable housing is financed. One significant change will be lowering the long-standing “50% Test” for tax-exempt private activity bonds to 25%.

While the adjustment may seem technical, its impact could be far-reaching: expanding access to 4% Low-Income Housing Tax Credits (LIHTCs), creating new development opportunities, and stretching limited bond volume further. At the same time, it introduces important considerations for how projects are structured and financed, making it a critical development for industry stakeholders to monitor.

Understanding the 50% Test

For decades, developers seeking 4% Low-Income Housing Tax Credits (LIHTCs) have satisfied the 50% test: at least half of a project’s [“aggregated basis plus land”] [eligible] costs would be financed with tax-exempt private activity bonds. Meeting this threshold “unlocks” the ability to claim tax credits across the full project basis, making it the gateway to feasibility for countless affordable housing communities.

By lowering this requirement to 25%, states can achieve more with their existing bond allocations, enabling projects that might otherwise be sidelined by bond scarcity—particularly in high-demand states like California, New York, and Texas.

Unlocking New Possibilities

The new “25% Test” will be transformative:

• More Homes, Same Resources: The same amount of bond cap could support more projects, expanding affordable housing supply.
• Flexibility for Developers: Smaller bond issuances reduce issuance costs and help some projects avoid unnecessary debt.
• Opportunities for Smaller Markets: Projects in rural or less densely populated areas may now have viable access to 4% credits.

Taken together, these benefits have the potential to reshape the pipeline of affordable housing nationwide.

Weighing the Challenges

As with all policy shifts, the benefits come with trade-offs. Lower reliance on tax-exempt bonds could mean greater dependence on taxable construction debt. This could bring higher interest rates, reduced loan proceeds, and increased reliance on scarce gap financing sources into play.

For developers, agencies, and lenders alike, this shift will require new financial models, revised underwriting standards, and closer collaboration to ensure that feasibility is preserved even as bond volume is stretched further.

Looking Ahead

This change to the 25% test is both exciting and complex. While it can open the door to more affordable housing production, it also calls for careful planning, updated financial approaches, and close coordination among developers, issuers, and funders.

CSG will be watching this policy closely alongside our clients and partners. The shift to the 25% test will reshape financing strategies in meaningful ways, and thoughtful planning will be key to ensuring that it delivers lasting benefits for affordable housing.

This is a moment to celebrate, but also a moment to prepare. The real work begins in how we adapt our financing strategies to make the most of this opportunity without losing financial feasibility in the process.

Want help thinking through how this could affect your projects? Let’s talk.

Source: H.R. 1 — 119th Congress: One Big Beautiful Bill Act. Retrieved from https://www.congress.gov/119/bills/hr1/BILLS-119hr1enr.pdf