The 25% bond test: what OBBBA changed for 4% LIHTC deals in Hawaii

The One Big Beautiful Bill Act, enacted July 4, 2025, made two permanent changes to the Low-Income Housing Tax Credit. The one that got the headlines was a 12% increase in 9% allocation authority starting in 2026. The one that matters more for Hawaii is the other one: the bond financing test for 4% credits dropped from 50% of aggregate basis to 25%.

That sounds like a technical adjustment. It is the largest structural change to the program in roughly thirty years, and in Hawaii it lands on a volume cap that behaves differently than it does almost anywhere else.

What the test actually is

A 4% credit deal is not allocated by the state the way a 9% deal is. It comes attached to tax-exempt private activity bonds, and the credit is available only if the bonds finance enough of the building. Under IRC §42(h)(4), that threshold has been 50% of the aggregate basis of the building and the land it sits on since the program’s modern form took shape.

So the arithmetic ran backwards from the cap. A state receives an annual private activity bond volume cap. Every 4% deal consumed bond cap equal to at least half of its aggregate basis, whether or not the developer wanted that much debt. Plenty of deals issued bonds they did not need, held them briefly, and retired them once the test was satisfied — the bonds were a toll paid to reach the credit.

OBBBA cut that threshold to 25%. Same credit, half the bonds.

The effective date is the part that bites

The new threshold applies to buildings financed by bonds issued after December 31, 2025. Not closed after, not placed in service after — issued after.

That created a real problem for anything that was mid-closing in late 2025, and Congress left a narrow bridge. A building financed with pre-2026 bonds can still reach the 25% test through a supplemental issuance in 2026, but the supplemental amount is capped at the lesser of:

5% of the building’s aggregate basis, or
the difference between the 50% and 25% thresholds.

In practice that rescues deals that were already close to the line and does nothing for deals that were financed at a clean 50%. If you closed in, say, October 2025 at exactly 50%, the 5% supplemental does not get you to 25%, and you are a 50%-test building for the life of the deal. Transition arithmetic of this kind rewards whoever read the statute in August 2025 and punishes whoever waited for a summary.

Why Hawaii’s volume cap is unusual

Private activity bond cap is set annually under a formula with two branches: a per-capita amount, or a small-state minimum, whichever is greater. For 2026, Rev. Proc. 2025-32 set those at $135 per capita and a small-state minimum of $397,625,000.

Hawaii’s population is roughly 1.44 million. Run both branches:

Branch	2026 figure	Hawaii result
Per capita	$135 × ~1.44M	~$194 million
Small-state minimum	flat	$397,625,000

Hawaii takes the minimum, and the minimum is about double what a per-capita calculation would give. On a per-resident basis Hawaii receives roughly $276 of bond cap against the $135 a large state receives — one of the quiet structural advantages in Hawaii’s housing finance position, and one almost never mentioned in discussions of the shortage.

Note that the 9% credit works the other way. For 2026 the per-capita credit amount is $3.416 with a small-state minimum of $3,953,600. At ~1.44 million people the per-capita branch produces roughly $4.9 million, so Hawaii draws per-capita on 9% credits and the small-state minimum on bonds. Two programs, two branches, in the same state in the same year. It is worth checking which branch applies before assuming a state’s capacity from its population.

What the change does to capacity

Hold the cap constant and apply the two thresholds:

	50% test	25% test
Annual PAB volume cap	$397.6M	$397.6M
Aggregate basis supportable	~$795M	~$1.59B
At $600k per unit	~1,325 units	~2,650 units

The $600,000 per-unit figure is conservative for Hawaii; the 2024 Hawaii Housing Planning Study put construction costs above that level, and anything with structured parking or a difficult site runs higher. Treat the unit counts as an order of magnitude, not a forecast — aggregate basis includes land, and the land share in Honolulu is nothing like the land share in Hilo.

Still, the shape of the result holds. The same cap now reaches roughly twice as much basis. For a state that was genuinely cap-constrained, that is transformative.

And here is the uncomfortable part

Hawaii was probably not cap-constrained.

The 2024 Hawaii Housing Planning Study put statewide need at 64,490 units by 2027, with 42,100 of those at or below 80% AMI and 17,242 at or below 30% AMI. Nothing in that gap was caused by a shortage of tax-exempt bond authority. It was caused by the cost of building — above $600,000 a unit — set against what a 60% AMI rent can carry.

Those rents are published. For 2026 in Honolulu County at 60% AMI, maximum rents including a utility allowance run $1,617 for a studio, $1,732 for a one-bedroom, $2,079 for a two-bedroom and $2,403 for a three-bedroom. A two-bedroom at $2,079 does not amortize a $700,000 unit. The gap between what the unit costs and what the rent supports is the binding constraint, and it is closed with subsidy: the Rental Housing Revolving Fund, DURF, county contributions, land at nominal cost, and whatever else can be assembled.

The 25% test does not add a dollar of gap subsidy. It frees bond authority that, in Hawaii, was not the scarce input. What it does usefully is reduce transaction cost and remove deadweight debt from capital stacks, which is real and worth having. It may also shift some deals that would have competed for 9% credits — where Hawaii is constrained, drawing per-capita — into the 4% lane, which indirectly loosens the thing that actually binds.

That second-order effect is the one to watch in the next few funding rounds. If 4% deals that previously could not pencil now do, the 9% round gets less crowded. Whether that shows up depends almost entirely on whether RHRF and DURF scale alongside, and that is a state budget question, not a federal tax question.

Where to look next

The 2026 Consolidated Application round opened December 19, 2025, with letters of intent due January 16, 2026, mandatory applicant training on January 21, and applications due February 20, 2026. The 2027 round should open on a comparable schedule in December 2026. Two things are worth reading closely when it does:

Whether the 2027 QAP scoring changes in response. States have been writing 25%-test implementation into their allocation plans through 2026. The 2026 Hawaii QAP was finalized November 14, 2025 — before anyone had run a full cycle under the new threshold — so the 2027 document is the first real signal of how HHFDC intends to handle it. Compare it against the published summary of changes rather than reading 223 pages twice.
Whether gap funding moves. Hawaii Builds commits $100 million from DURF over five years. If 4% capacity has doubled while gap subsidy has not, the queue simply re-forms at the subsidy stage.

One more deadline worth noting while underwriting anything in 2026: the §45L energy-efficient home credit sunsets June 30, 2026. If it was in your sources and uses, check that it still is.

This article reads federal statute and published state documents. It is not tax advice, and the 25% test’s application to a specific building depends on facts this article cannot know — particularly issuance dates and the composition of aggregate basis. Verify the arithmetic above against Rev. Proc. 2025-32 and Hawaii’s published volume cap allocation before relying on it, and talk to bond counsel.