A federal program that helps finance rental housing in rural communities is changing the way it rewards certain projects, replacing an incentive for energy-efficient construction with one aimed at attracting investment to Qualified Opportunity Zones.
The U.S. Department of Agriculture announced September 30 that it had revised the fee structure for its Section 538 Guaranteed Rural Rental Housing Program, commonly called the GRRHP. The change took effect the same day it was published in the Federal Register.
Under the new policy, new construction and substantial rehabilitation projects located in federally designated Qualified Opportunity Zones can receive lower initial and annual loan-guarantee fees. At the same time, USDA retired a reduced-fee category that had applied to qualifying green and energy-efficient projects.
“The revised fee structure demonstrates our commitment to expanding affordable housing opportunities in rural America,” Rural Housing Service Administrator George Kelly said in announcing the change.
USDA said the revision is intended to encourage affordable rental housing development while directing more investment toward economically distressed rural communities.
The change is not an across-the-board reduction in Section 538 fees. Instead, it changes which projects qualify for one of the program’s existing discounted fee structures.
How the Section 538 Program Works
USDA does not lend the money directly under Section 538. Private lenders make the loans, and USDA guarantees them for eligible rural rental housing projects.
USDA can guarantee up to 90% of the unpaid balance on a Section 538 loan. That reduces lenders’ exposure and can make them more willing to finance rural rental projects that are harder to fund through conventional lending.
Non-profit organizations, businesses, public agencies, and federally recognized tribes can use the program. Projects must have at least five rental units and meet USDA rules for location, rents, and tenant income. When tenants first move in, household income typically cannot exceed 115% of the area median income, adjusted for family size.
Developers using the program pay USDA an initial guarantee fee and an annual fee.
For projects that do not qualify for a reduced fee, USDA’s current standard is 65 basis points — or 0.65% — for the initial guarantee fee and 35 basis points, or 0.35%, annually.
Several categories receive lower rates of 60 basis points initially and 25 basis points annually. Those categories now include workforce housing, preservation of certain existing USDA-financed properties, and new construction or substantial rehabilitation in Qualified Opportunity Zones.
The difference is relatively small as a percentage, but on a large multifamily project it can reduce financing costs over the life of the loan.
The initial fee is calculated from the guaranteed portion of the loan, while the annual fee is based on the outstanding principal balance and is paid in advance each year.
Green Incentive Replaced by Geographic Incentive
The most significant policy change is not the discount amount but the requirement to qualify for it.
USDA established its previous fee structure in 2022. Under that system, new construction and substantial rehabilitation projects could receive the reduced 60-basis-point initial fee and 25-basis-point annual fee by meeting recognized green building standards.
USDA recognized several green-building standards under the old fee structure, including Enterprise Green Communities, LEED, ENERGY STAR, the National Green Building Standard and Passive House. Existing properties could qualify, too, if they met the program’s energy-performance requirements.
The September 30 rule eliminates that category for new applications and replaces it with location in a Qualified Opportunity Zone.
That means the incentive is moving from a standard based largely on a project’s building and energy-performance characteristics to one based on where the property is located.
USDA said the shift aligns the housing program with administration priorities and with President Donald Trump’s March 2026 executive order directing federal agencies to examine regulatory barriers to housing construction and better coordinate certain federal programs with Opportunity Zones.
Projects already approved or obligated under the former green category will keep their reduced fees. Applicants who submitted projects but have not yet received an obligation may revise their applications if the property qualifies under the new Opportunity Zone category.
Opportunity Zones Take on a Larger Role
Congress created Qualified Opportunity Zones in the 2017 Tax Cuts and Jobs Act as an economic-development tool designed to encourage private investment in lower-income communities.
Investors can receive favorable federal tax treatment by directing eligible capital gains through Qualified Opportunity Funds and investing those funds in designated census tracts.
Congress made the Opportunity Zone program permanent in 2025 and revised several of its provisions, including new incentives aimed specifically at rural areas. A new round of Opportunity Zone designations is scheduled to take effect January 1, 2027, with additional rounds every 10 years.
For the 2027 round, the IRS found more than 25,000 low-income census tracts that could qualify as Opportunity Zones. More than 8,300 of them are rural. Governors could nominate qualifying tracts in their states for federal approval in 2026.
Treasury Secretary Scott Bessent has argued that making the program permanent gives investors and local officials greater certainty.
The changes are intended to give them “the long-term certainty they need to commit capital to communities that have been overlooked for too long,” Bessent said in an April IRS announcement.
The revised federal law also provides additional incentives for rural Opportunity Zones. Among them is a lower threshold for how much an investor must spend to substantially improve certain property in a rural zone.
USDA’s Section 538 revision adds another federal benefit for rental-housing projects in those areas.
Housing and Communities Division
Center for Local Finance and Growth Photo courtesy of the Urban Institute
Results of Opportunity Zones Remain Difficult to Measure
The increased federal emphasis comes as researchers continue trying to determine how much the first generation of Opportunity Zones improved economic conditions in the communities they were intended to help.
An August 2026 Government Accountability Office review found that Qualified Opportunity Funds held more than $108 billion in assets at the end of 2024. But GAO said much of the investment had flowed into real estate projects in urban areas that already had infrastructure and other characteristics attractive to investors.
GAO found examples of communities attributing new housing and job creation to Opportunity Zone investment. Still, most state officials contacted for the study said they could not determine the program’s overall economic effect. About 20% of states cited increased housing or job creation among the effects they had observed.
The agency also found uncertainty about whether the enhanced rural incentives would substantially change where investors put their money.
Some fund representatives and community officials told GAO that the rural provisions could encourage more investment. Others pointed to longstanding obstacles in rural communities, including population loss, lower rents and development costs that may not be substantially lower than those in stronger markets.
Those questions matter because a tax or financing incentive alone does not necessarily make an otherwise unworkable housing project financially feasible.
Brady Meixell of the Urban Institute has raised a similar concern about the broader Opportunity Zone model. Research to date, the institute noted, indicates that investment decisions have often followed existing market conditions rather than community needs.
“You’re not shaping the market, you’re kind of layering on top of existing markets,” Meixell said.
That criticism was directed at the Opportunity Zone program generally, not USDA’s September 30 Section 538 decision.
Rural Housing Pressure in Appalachia
The policy change could be particularly relevant in parts of Appalachia, where communities face a mix of aging housing, limited rental inventory, and difficulty financing new construction.
A Housing Assistance Council analysis of Central Appalachia found that the region’s rental housing supply has declined as a share of the overall housing stock since 2014. The report also cited research finding that nearly half of renter households in Central Appalachia and Appalachian Alabama were housing-cost burdened, meaning they spent a substantial share of their income on housing.
The challenge varies considerably from one Appalachian community to another.
Appalachian Regional Commission data released in 2026 found that the region as a whole had fewer cost-burdened households than the national average. Still, renters at the lowest incomes remain particularly vulnerable. The region’s median income reached $66,555, compared with $80,734 nationally, while its poverty rate remained above the national rate.
Those differences illustrate why the practical effect of USDA’s new incentive may depend heavily on which rural census tracts receive Opportunity Zone designations and whether developers can assemble projects that work financially in those communities.
Section 538 financing can help address one piece of that equation by reducing lenders’ risk exposure. But developers still must contend with land and construction costs, rents that local households can afford, and the amount of private capital available for a project.
What the change Could Mean for Rural Developers
For developers already considering Section 538 financing, a proposed project’s location now matters more.
A qualifying property inside an Opportunity Zone can receive the lower USDA fee previously available to qualifying green projects. A similar project immediately outside a designated zone may face the standard rate unless it qualifies under another reduced-fee category.
The change therefore creates another financial reason for developers and lenders to review Opportunity Zone maps when considering rural multifamily projects.
At the same time, eliminating the separate green category means energy-efficient construction, by itself, no longer provides access to that particular Section 538 fee discount.
That does not prohibit developers from building to higher efficiency standards, and other building codes, financing requirements, or incentive programs may still encourage them to do so. But for this USDA loan-guarantee program, geographic location has replaced green certification as the basis for that specific reduced-fee category.
The new fee structure may help some projects, but it will not solve the larger financing problem by itself. Developers still have to make the numbers work, attract investors, and keep rents within residents’ reach. Communities that earn Opportunity Zone status will decide where to use the incentive.
For rural communities facing housing shortages, the revised Section 538 rules create another potential financing advantage. They also place more of the federal government’s rural housing strategy alongside a broader economic-development experiment whose long-term effects, according to federal auditors, are still being measured.
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