Starting in 2026, federal law permanently lowers the tax-exempt bond financing threshold for many 4% Low-Income Housing Tax Credit developments from 50% to 25%. That change can help scarce private activity bond authority support more affordable housing. It also changes when insurance planning needs to become real.
More Deals Can Move With Less Bond Volume
The Congressional Research Service identifies LIHTC as the federal government’s primary tool for encouraging affordable rental housing and confirms the permanent 25% threshold. The policy can make the 4% credit structure available with a smaller share of tax-exempt bond financing.
Eligibility is still transaction-specific. NCSHA notes that the new threshold applies to qualifying properties placed in service after December 31, 2025, with applicable multifamily Housing Bonds issued in 2026 or later. State housing agencies are also adopting their own implementation policies. Developers should confirm the controlling requirements with their housing agency, bond counsel, tax counsel, lender, and investor.
Insurance Assumptions Need To Move Earlier
A smaller bond slice does not reduce replacement cost, construction hazards, liability, weather exposure, or delay risk. It may instead create a more varied capital stack, with each source carrying its own insurance conditions, closing deadlines, and documentation expectations.
Insurance cannot remain a line-item estimate until closing. Owners should test required limits, deductibles, named insureds, lender clauses, builder’s risk terms, catastrophe capacity, and premium timing while sources and uses are still being negotiated. A late insurance correction can consume contingency, disrupt a draw, or force changes after documents are substantially complete.
Test The Capital Stack Against The Risk Stack
Before committing to the revised financing structure, align four workstreams:
- Values And Scope: Confirm hard costs, soft costs, existing property, off-site materials, and escalation assumptions.
- Funding Conditions: Map each lender, investor, agency, and bond requirement to the insurance program.
- Schedule Exposure: Model premium, deductible, and delay impacts against closing, construction, and placed-in-service milestones.
- Contractor Risk Transfer: Reconcile indemnity, additional insured, waiver, bonding, and subcontractor requirements before mobilization.
Gatta’s View
The 25% test can improve feasibility, but feasibility is not the same as readiness. The strongest 4% LIHTC deals will use the added financing flexibility to resolve risk earlier, not postpone it. When the capital stack and risk stack are designed together, teams can protect tax-credit execution, construction continuity, and long-term asset performance.
Authoritative Sources
- Congressional Research Service: An Introduction to the Low-Income Housing Tax Credit
- NCSHA: State Policies on New 25% Bond Financing Threshold
- Congress.gov: Public Law 119-21 Legislative Text
Planning A 4% LIHTC Closing?
Bring insurance into the capital-stack conversation before requirements harden. Gatta Insurance helps affordable housing teams align coverage, contracts, financing conditions, and construction risk.
