Bond attorneys wrestling with new LIHTC rules

“This has been on the wish list for the Section 42 (LIHTC) community for quite some time,” said Ed Oswald, a partner at Orrick’s Washington D.C. office. “In my practice, there was a lot of dialog and energy about this provision. I think it has subsided somewhat to where people are now trying to figure it out. I think it will presumably have some incremental benefit.”

Burwell Photography – John Burwe

The One Big Beautiful Bill Act tweaked the rules governing Low-Income Housing Tax Credits, much to the delight of the affordable housing sector as bond lawyers are now working through the fine print without much support.

“This has been on the wish list, for the Section 42 (LIHTC) community for quite some time,” said Ed Oswald, a partner at Orrick’s Washington D.C. office.

“In my practice, there was a lot of dialog and energy about this provision. I think it has subsided somewhat to where people are now trying to figure it out. I think it will presumably have some incremental benefit.”

The comments came during a panel discussion on Wednesday at the National Association of Bond Lawyers Workshop event being held in Washington, D.C.

Low Income Housing Tax Credits are issued by the Internal Revenue Service and administered by state-level Housing Finance Agencies.

OBBBA makes a temporary 12% increase in the allocation of 9% LIHTCs permanent starting in 2026. It also reduces the amount of private activity bond financing needed for affordable housing developers to quality for 4% tax credits from 50% to 25%.

Housing advocates maintain that dropping the percentage will increase PAB efficiency and allow projects to carry less debt resulting in more eligible projects.

The bond attorneys aren’t completely convinced that lowering the bond ratio is going to have the desired effect.

“That may work well if you have a project that has unending amounts of money for the capital stack,” said Mathias Edrich, a partner at Kutak Rock’s office in Denver.

“But by having a lower amount of tax-exempt bonds, you’re putting more pressure on other funding sources, like taxable financing, and that simply increases the cost of these projects.”

Bonds that are no longer needed to qualify for affordable housing development may find other uses.

“That volume cap could be assigned to other projects including single family mortgage bonds, solid waste disposal, or manufacturing bonds,” said Edrich.

Both the new rules are scheduled to take effect in 2026. The LIHTC reform provisions include an “interim rule,” that grants the 25% adjustment retroactively to bonds issued in 2025.

The complex requirements include, “at least 5% of the aggregate basis of any project must be financed by tax-exempt bonds issued after December 31, 2025, and the project must be placed in service after December 31, 2025.”

According to the lawyers, the rule raises questions about the rules governing draw-down bonds as laid out in Section 150 of the tax code and creates ambiguity about the difference between “an issue” and “issue date.”

“Things that we know that make a difference are just not known on the Hill to drafters who draft this stuff,” said Oswald.

“With retirements and lack of senior staff at Treasury when they write bond language, they don’t perhaps know the nuances. It is indicative of the tax system at large, especially when it comes to our universe. It takes a long time to learn, and there’s really been a brain drain.”