The financing challenge: need for gap funding

A sample urban regeneration scheme: gap funding needed!

To illustrate the challenges, consider a sample property (affordable housing within an urban regeneration area) with a funding gap: It will cost £2,000,000 to develop but will have an economic value (homeownership sale price or capitalised value of the rentals).

Uses		Sources
1,800	Hard costs	Cash from sales prices
100	Soft costs	or
100	Developer fee	Capitalised value of rentals	1,250
*2,000*	*Total development cost*	*Total permanent financing*	*1,250*

Problem: £750,000 funding gap!

Using HART Credits to fund the financing gap before construction starts

Under a normal funding scheme, the sponsor would have to secure up-front grant funding for the entire gap . HART Credits can serve the same purpose, but with the government paying only for performance. By pledging a chit (the promise of future tax credits), government can induce the private sector to contribute construction-period equity that closes the funding gap:

	Construction financing
Sources
750	Tax credit equity
1,000	Construction loan
250	Sponsor equity
*2,000*	*Total construction sources*

Uses
1,800	Hard costs
100	Soft costs
100	Developer fee
*2,000*	*Total development cost*

Delivery of HART Credits satisfies the investor and completes the financing

Permanent financing
Uses
Credits provide investor yield	*1,000*
Repay construction loan	1,000
Repay sponsor equity	250
*Total uses at permanent*	*1,250*

Sources
Cash from sales prices
or
Capitalised value of rentals	1,250
*Total permanent financing*	*1,250*

The completed transaction

The transaction is now complete and in balance:

Sample affordable housing urban regeneration scheme
All figures in £000's

	Construction financing	Permanent financing
Sources		Uses
750	Tax credit equity	Credits provide investor yield	1,000
1,000	Construction loan	Repay construction loan	1,000
250	Sponsor equity	Repay sponsor equity	250
*2,000*	*Total construction sources*	*Total uses at permanent*	*1,250*

Uses		Sources
1,800	Hard costs	Cash from sales prices
100	Soft costs	or
100	Developer fee	Capitalised value of rentals	1,250
*2,000*	*Total development cost*	*Total permanent financing*	*1,250*

Capitalised value of rentals

Capitalised value of rentals

Capitalised value of rentals