Financing Rules Expand Affordable Build Capacity
San Diego, CA — Updated Sept. 9, 2025
Southern California could see a gradual uptick in income-restricted rental construction over the next few years, thanks to recent federal tax changes that expand the pool of financing for affordable housing—and fast-track alignment by California agencies. CalMatters
What Changed
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- More 9% credits (permanent increase). States receive a larger ongoing allocation of 9% Low-Income Housing Tax Credits (LIHTC), allowing more projects to pencil into feasibility. novoco.com+1
- Lower bond threshold for 4% credits (the “50% test” → 25%). Projects can now qualify for 4% credits with a smaller share of tax-exempt bond financing, freeing scarce bond capacity so more developments can move forward. California’s tax credit committee has initiated emergency rulemaking to implement the 25% test in current allocation rounds. California State Treasurer’s Office+1
Why It Matters for SoCal
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- More viability = more starts. The reduced bond requirement could unlock stalled deals across Los Angeles, San Diego, the Inland Empire, and Ventura—especially mid-scale infill and transit-proximate sites common to the region. LAist
- Pipeline outlook. Independent analyses estimate these changes could finance a significant increase in affordable rentals nationwide over 2026–2035, with California capturing a meaningful share. Actual SoCal delivery will depend on local funding and project readiness. novoco.com+1
Timing to Watch
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- Near-term (this fall through early 2026): California application updates and rounds reflecting the 25% test are underway, potentially moving queued projects to closing. California State Treasurer’s Office
- Medium-term (2026–2028): Expect more Southern California starts as financing closes and construction cycles turn into deliveries. novoco.com
Important Caveats
Expanded credit capacity doesn’t eliminate other constraints. Outcomes still hinge on:
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- Local gap funding layers that typically accompany LIHTC deals.
- Construction inputs (labor, materials) and interest-rate conditions.
- Bond administration details as California allocators manage demand under the new threshold. LAistCalifornia State Treasurer’s Office
The Southern California Map (At a Glance)
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- Los Angeles County: Infill, mixed-income, and transit-oriented projects stand to benefit from added bond/credit flexibility. CalMatters
- San Diego County: Persistent rent pressure and tight vacancy increase the value of marginal new supply; more mid-scale LIHTC deals may pencil. LAist
- Inland Empire: Entitlement speed and land availability can amplify the impact of easier bond access. LAist
Quick FAQ
What is LIHTC?
The Low-Income Housing Tax Credit is the nation’s primary tool to finance income-restricted rental housing. States award credits that attract private capital to build and preserve affordable units. CalMatters
What is the new “25% test”?
To use 4% credits, projects previously needed 50% of the eligible costs financed with certain tax-exempt bonds. The threshold is now 25%, freeing bond capacity and allowing more developments to qualify. California has begun implementing this change in current rounds. California State Treasurer’s Office
When will Southern California see an impact?
Application changes are already in motion. The bigger wave arrives from 2026 onward as financed projects break ground and deliver. GFOA
Key Takeaways
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- New federal LIHTC provisions expand financing capacity via a permanent 9% allocation increase and a 25% bond test for 4% deals. novoco.comCalifornia State Treasurer’s Office
- California is implementing rule changes now, which could accelerate approvals for projects already in the queue. California State Treasurer’s Office
- SoCal impact should build from 2026 onward, with near-term progress tied to application rounds, local funding, and construction conditions. novoco.com
Sources: CalMatters and LAist reporting on California’s pipeline implications; Novogradac analyses on national unit financing potential; California Tax Credit Allocation Committee (CTCAC) and CDLAC rulemaking materials. CalMattersLAistnovoco.com+1California State Treasurer’s Office+1
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