What actually changed
The reconciliation bill signed in July 2025 permanently lowered the bond financing threshold from 50% of aggregate basis to 25%. The lower test applies to buildings placed in service after December 31, 2025 that are financed with bonds issued after December 31, 2025. There is a transition provision for deals that were already in the pipeline: a supplemental bond issuance in 2026 can bring an older deal under the new test, capped at the lesser of the amount needed to satisfy the old 50% test or 5% of aggregate basis. The same bill permanently increased each state's 9% per capita credit ceiling by 12% beginning in 2026.
Why it matters more than it sounds
Half of aggregate basis is usually far more bond debt than a deal can carry. Sponsors issued it anyway, because the credits depended on it, and then paid the bonds down at conversion with equity and soft sources. The cost of that was real. You paid issuance costs, cost of issuance caps ate into basis, negative arbitrage on the escrow ran for the whole construction period, and the bond counsel and trustee fees were sized to a par amount you never intended to keep.
At 25%, the bond issue can be sized much closer to what the property will actually support. Negative arbitrage shrinks because the escrow is smaller and shorter. Issuance costs come down in absolute dollars. On a deal with $40 million of aggregate basis, the required par amount moves from $20 million to $10 million, and the carrying cost of the difference through a two year construction period is not a rounding error.
The second order effect: volume cap
The more consequential change is at the state level. Private activity bond volume cap is a rationed resource, and in most high cost states it has been the binding constraint on 4% production for years. If every deal needs half the bonds it used to need, the same annual cap supports roughly twice as many deals.
That does not mean twice the production. Some states will re prioritize, some will tighten their QAP scoring, and the gap financing that 4% deals depend on did not double. But if your state has been turning away 4% applications for lack of cap, the arithmetic of your next application changed. Ask the issuer how they are reading it before you size anything.
What to do differently on your next 4% deal
Run the bond sizing twice. Once at 25% of aggregate basis and once at whatever the property actually supports on a sustaining basis, and take the higher of the two. The test is a floor, not a target. If the property supports $14 million of permanent debt and the 25% floor is $10 million, you are issuing $14 million and you have stopped thinking about the test at all.
Watch the 5% rule if any part of your bond issue predates 2026. The transition provision is narrow and it is measured against aggregate basis, not against the bond amount. Get your accountant to run the cost certification assumption early rather than at the end.
And re examine deals you shelved. A 4% application that failed on cap availability or on negative arbitrage in 2024 is a different application in 2026. We have been going back through those with clients and some of them now pencil.
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