How the 25% Bond Test Unlocks 4% LIHTC Projects in California — What Developers Need to Know in 2026

The affordable housing finance landscape shifted dramatically on July 4, 2025, when the One Big Beautiful Bill Act was signed into law. Among its provisions, one change stands to reshape California's affordable housing pipeline more than any federal action in nearly two decades: the reduction of the private activity bond financing threshold for 4% Low-Income Housing Tax Credits (LIHTC) from 50% to 25%.

Novogradac estimates this single change could finance more than one million additional affordable homes nationally between 2026 and 2035. California moved faster than any other state to implement it — and the first results are already visible. Here's what affordable housing developers, syndicators, and finance professionals need to understand.

What the 25% Bond Test Is (and Was)

Under the old 50% test, a project had to finance at least 50% of its aggregate land and building costs with tax-exempt private activity bonds (PABs) to qualify for 4% federal LIHTC. This threshold created a structural constraint: to access 4% credits, developers were forced to over-leverage projects with bond debt, producing deals with thin equity margins and limited ability to support deeper affordability.

Under the new 25% test, a project need only finance 25% or more of its aggregate basis with PABs to qualify for the 4% credit. The practical effects:

• Smaller bond tranches — Projects can access 4% credits with significantly less bond debt, improving debt service coverage ratios and expanding the universe of viable deal structures.
• More projects qualify — Projects in high-cost markets that couldn't reach 50% bond financing without negative leverage can now access credits with a more modest bond tranche.
• Deeper affordability becomes pencil-able — With less mandatory debt service, projects can target lower AMI bands (30%, 40%) without requiring excessive operating subsidies.

California's Implementation: Emergency Regulations and $2 Billion in New Allocations

California's CDLAC (California Debt Limit Allocation Committee) and CTCAC (California Tax Credit Allocation Committee) moved swiftly. Within 90 days of enactment, both agencies adopted emergency regulations to implement the 25% test — making California the first state in the country to operationalize the new standard.

The results were immediate. In its fall 2025 funding round, CDLAC awarded more than $2 billion in bond allocations to 108 developments — a record for a single round, enabled in part by the new 25% threshold allowing smaller bond tranches per project and thus more projects per dollar of bond authority.

Deal Structuring Under the 25% Test: A Practical Comparison

To understand the real-world impact, consider a hypothetical 80-unit family affordable project in Los Angeles County:

Under the old 50% test:

• Total development cost (TDC): $34M


• Required bond financing (50% of land + building costs ≈ $27M basis): $13.5M


• At a bond rate of 6.5%: annual debt service ≈ $936,000


• Net Operating Income (NOI) required to support debt service plus expenses: very tight


• 4% credit equity generated: ≈ $9.2M

Under the new 25% test:

• Required bond financing (25% of $27M basis): $6.75M


• At a bond rate of 6.5%: annual debt service ≈ $468,000


• NOI requirement drops significantly; project can target 40% AMI units without a gap


• 4% credit equity generated: same ≈ $9.2M (credit amount unchanged)


• Gap in capital stack is closed by reduced debt service, not additional subsidy

The 25% test doesn't change the amount of tax credits a project generates — it changes how those credits interact with the rest of the capital stack by reducing mandatory debt.

Project Types That Benefit Most

Senior and Special Needs Housing
Projects serving extremely low-income (ELI) households — residents at 30% or 40% AMI — have historically struggled under the 50% test because the required bond debt service consumed operating income that ELI rents couldn't support. The 25% test makes these deals substantially more viable without requiring additional operating subsidies.

High-Cost Market Projects
In San Francisco, Santa Clara, and other high-cost counties where land represents a disproportionate share of TDC, the 50% test frequently pushed projects into over-leveraged positions. The 25% test provides meaningful relief by right-sizing the bond tranche to the project's actual financing needs.

Smaller Projects
Projects under 50 units — which are common in rural California and suburban infill contexts — often couldn't generate enough 4% credit equity to make the 50% bond test work. The 25% threshold opens the 4% credit to a class of smaller projects that have largely been 9%-credit-dependent.

The Interplay with 9% Credit Authority

The One Big Beautiful Bill Act also made permanent a 12.5% increase in 9% credit authority that was first enacted in 2018. For California, this means approximately $40 million in additional annual 9% credit authority — enough to fund roughly 8–10 additional competitive projects per year.

Savvy developers are now restructuring their pipelines to take advantage of both changes simultaneously: using the 25% bond test to advance projects that previously didn't pencil as 4% deals, while competing for enhanced 9% credit authority in rounds where the deeper subsidy is needed.

What Developers Should Do Now

1. Re-underwrite your 4% deal pipeline. Any project that was rejected or tabled under the 50% test because it couldn't support the required bond debt should be re-modeled under the 25% test. The capital stack assumptions have changed materially.

2. Engage your bond counsel early. The emergency regulations adopted by CDLAC and CTCAC have specific definitions of "aggregate basis" and the calculation methodology for the 25% test. Bond counsel familiar with California's implementation rules is essential for structuring compliant transactions.

3. Talk to your syndicator about pricing. Reduced bond debt means different credit pricing dynamics. Some syndicators are adjusting their yield requirements given the improved deal structures enabled by the 25% test. Get current market pricing before finalizing pro formas.

4. Evaluate deeper affordability targeting. If your project can now support adequate debt service with a smaller bond tranche, consider whether deeper AMI targeting — 40% or 30% AMI bands — becomes feasible. CTCAC awards competitive scoring points for deeper affordability, and HUD's Section 8 project-based voucher (PBV) program can underwrite units targeted at 30% AMI.

The Bottom Line

The 25% bond test is the most consequential structural change to the 4% LIHTC program since the Housing and Economic Recovery Act of 2008. California's rapid implementation — emergency regulations, record bond allocations, and 108 projects funded in a single round — signals that the state is committed to maximizing its impact.

For developers with California projects in their pipeline, this is not a regulatory nuance to be tracked by your finance team. It is a fundamental change in what deals work, what deals don't, and which projects deserve a second look.

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Affordable Housing Partners tracks CTCAC allocations, CDLAC bond awards, and California housing finance developments. Explore funded projects in your county or connect with a housing finance partner.