LIHTC Expansion Stalls as Financing Bottlenecks Emerge

The expansion of the nation’s primary affordable housing tool is running into a familiar problem: financing.

Donald Trump’s tax law overhaul was expected to supercharge the Low-Income Housing Tax Credit program, unlocking a wave of development. Instead, deal flow has slowed as larger, credit-fueled projects struggle to secure bank backing, according to Bloomberg.

The changes made last summer widened the scope of eligible deals, allowing developers to pursue bigger projects with more credits. But that scale-up has collided with regulatory caps that limit how much banks can invest in so-called public welfare projects.

The result: fewer lenders are able to participate in the kinds of large deals the overhaul was meant to encourage.

“The market has slowed pretty dramatically,” Jeff Jaeger of Standard Communities told Bloomberg, underscoring a disconnect between policy ambition and capital markets reality.

The tax credit expansion was billed as the most significant update to the program in decades; estimates suggested it could support 1.2 million additional affordable units over 10 years. But a surge in supply of credits also diluted their value, making them less attractive to corporate buyers who typically purchase them to offset tax liability.

At the same time, regional banks — a critical source of LIHTC equity — are nearing caps that limit such investments to 15 percent of regulatory capital. While the largest lenders still have room, many smaller institutions are effectively sidelined, constraining the pipeline.

Industry groups are pushing Congress to raise that cap to 20 percent, a proposal written into broader housing legislation that remains stalled on Capitol Hill. Without it, advocates warn billions in private investment could remain untapped.

Corporate players including Amazon, Microsoft and Urban Outfitters have stepped in to help fill gaps, either by buying credits or providing low-cost financing. But even that capital is being stretched as projects grow more complex and funding gaps widen.

The slowdown lands as housing affordability is expected to loom large in upcoming elections.

— Holden Walter-Warner