Tax-exempt bonds and the LIHTC bond-financing threshold

Tax-exempt bond financing can support an affordable housing capital structure and the federal LIHTC allocation exception. The borrower needs to distinguish three questions: whether the bond issue satisfies its tax requirements, whether the project satisfies the credit-financing threshold, and whether the debt and equity actually fund the development.

Those questions are connected but not interchangeable. Meeting a basis-financing percentage does not establish a mortgage amount, an investor contribution, a volume-cap award, or approval of the complete project.

Apply the current threshold with its effective conditions

The IRS's May 29, 2026 clarification states that the credit allocation exception can apply under the existing 50% aggregate building/land basis route or the conditional 25% route. For the latter, qualifying bonds from an issue dated after 2025 must finance at least 5% of that aggregate basis, and the building must be placed in service in tax years beginning after 2025.^[1]

The bonds must also meet the described qualifying financing requirements. A project should not apply the lower percentage without establishing every condition. Nor should it assume that all previously issued bonds automatically receive the revised treatment.

The December 2025 Form 8609 instructions still display the older 50% wording in the main page. Read that paragraph with the later correction rather than treat the earlier instruction as the final current rule.^[2]

Record issue dates, eligible financing amounts, building and related land basis, placed-in-service tax years, and how each amount is supported. Assign the tax calculation to the appropriate adviser and coordinating agency. A lender's preliminary loan amount is not a substitute for that work.

Keep the basis test separate from development leverage

The aggregate basis used for this threshold is not automatically the entire development budget. The IRS instructions separately address eligible and qualified basis for credits, as well as land that is functionally related and subordinate to the building.^[2]

Prepare a reconciliation that distinguishes the relevant bond-test basis, credit basis, total project uses, mortgageable costs, and accepted property value. Label the denominators rather than calling each one “project cost.” The same transaction can contain several legitimate but different amounts.

Likewise, the minimum bond-financing threshold does not require permanent debt to remain outstanding at that percentage in every structure. The treatment of proceeds, repayment, and redemption must be established under the applicable rules. The IRS clarification expressly addresses the relevant principal-payment/redemption or refunding conditions.^[1]

Bring proposed draw and redemption mechanics to bond counsel before relying on a financing plan. A bond principal amount shown on a closing document does not, by itself, prove that the required basis has been financed with qualifying proceeds.

Test the margin against basis growth

Consider a hypothetical project with $124 million of aggregate basis for the specified test. Assume $36.5 million of qualifying bond financing, of which $6.5 million comes from a qualifying post-2025 issue. Assume the placed-in-service condition and all other eligibility requirements are satisfied.

Total bond financing is approximately 29.44% of basis. The post-2025 financing portion is approximately 5.24%. Under those simplified inputs, both the 25% overall test and the 5% post-2025 test are met.

Now suppose accepted aggregate basis rises to $136 million while those financing amounts remain unchanged. Overall bond financing is approximately 26.84%, still above 25%. However, $6.5 million is only about 4.78% of the revised basis. The separate 5% condition fails on these assumed inputs even though the overall percentage passes.

The post-2025 amount would need to be at least $6.8 million at $136 million of basis, before any prudent buffer. That arithmetic does not establish whether additional issuance or financing is available or accepted. It identifies the issue the transaction team must solve.

For a project using the 50% route instead, half of $136 million is $68 million. Keep the two routes and their conditions distinct. A project that cannot establish the lower route should not assume the same $36.5 million amount meets the older threshold.

Update the basis and proceeds calculations as actual expenditures become known. A buffer should be deliberate and supported, with the cost of additional financing weighed against eligibility risk. Avoid aiming at the exact threshold on estimates that can change.

Coordinate volume cap and public approval

IRS Publication 4078 explains that qualified residential rental private-activity bonds are subject to the state volume-cap framework and describes public approval and other issuance requirements. State allocation procedures determine how available cap is assigned within the applicable limits.^[3]

A federal reduction in the credit-financing threshold does not create a state award automatically. Confirm the issuer, allocating authority, requested cap, applicable calendar, approvals, and available issuance route. Identify whether the proposed capital plan depends on a new award or existing valid allocation.

Maintain a combined calendar for the bond issue, construction financing, investor commitment, credit certification, and permanent conversion. An available federal tax rule is useful only if the project can satisfy it within the actual transaction timetable.

Separate the bond from its credit enhancement

Fannie Mae's MTEB fixed-rate execution uses a mortgage-backed security as collateral for qualifying bond structures. Its term sheet addresses new issues and refundings and identifies underwriting and payment mechanics. This is one specific execution, not a generic description of every tax-exempt housing bond.^[4]

In the unfunded-forward construction phase, the related Fannie term sheet describes cash-collateralized bonds and side-by-side construction/bond loans, with the MBS delivered after conversion. The roles of construction funding, bond collateral, and permanent mortgage should be shown separately.^[5]

Ask who advances funds, who bears credit risk at each stage, and which account holds proceeds or collateral. Do not count cash collateral as unrestricted development equity unless the accepted structure actually makes it available for that use.

The MTEB sheet also states that issuer and trustee fees enter loan sizing while being paid directly by the borrower. Include those amounts when comparing proceeds and annual financing burden; a credit-enhanced principal amount does not remove all transaction expenses.^[4]

Preserve compliance after issuance

Publication 4078 recommends post-issuance monitoring covering proceeds allocation, changes in use, tax filings, arbitrage, reissuance, and records. Qualification is not a one-time closing exercise.^[3]

Assign responsibility for tracking draws and expenditures and for evaluating later refinancing, changes in ownership, amendments, or property use. Keep records connecting qualifying proceeds to the basis calculation and the accepted bond structure.

The final financing decision should show which threshold route applies, the margin under each required test, the source of cap and approvals, and the debt/equity funding sequence. Preserve the dated IRS correction with the tax analysis. That makes the capital structure reviewable and avoids turning a useful statutory change into an unsupported assumption about available money.