Sample affordable housing urban regeneration scheme

£2,000,000
Total Development Cost
To develop these 20 houses will cost £100,000 apiece
Before the sponsor can start construction,
The sponsor must assemble this sum in ready cash

Black = Cost of development
Blue = Ready cash that is invested or lent

£1,000,000
Construction loan
Since the homes are worth £1,250,000,
A construction lender will provide this much (80% gearing)

Blue = Ready cash that is invested or lent
Red = Purchase price from market value of renovated homes

£250,000
Sponsor advance
To obtain the £1,000,000 construction loan,
The sponsor must contribute £250,000 equity (20% down)
But the sponsor must recoup this advance on sale

Blue = Ready cash that is invested or lent

£1,000,000
Allocation of HART Credits
Awarded by the RDA after a competitive allocation round
Based on sponsor readiness (including site control*)
But this by itself is not ready cash from equity investors
The sponsor probably must sell it
(at a discount for risk, time value of money, and due diligence)

Blue = Ready cash that is invested or lent
Orange = Allocation chit of HART Credits

£750,000
Capital from HART Credit investor
With the £1,000,000 allocation chit in hand,
Investor(s) know that the HART Credits will be available when the property is complete
Investor(s) will contribute £750,000 equity before construction starts
With the £1,000,000 construction loan
and the £250,000 sponsor advance
The sponsor has enough to meet the £2,000,000 development cost

Black = Cost of development
Blue = Ready cash that is invested or lent
Orange = Allocation chit of HART Credits

£1,250,000
Purchase price of homes
When the homes are completed, they have a £1,250,000 market value
So market homeowners will buy them for £1,250,000 cash
Which will be used to pay back the £1,000,000 construction loan
and the £250,000 sponsor advance
The homeowners need not know anything about tax credits or the HART Credit scheme
They just know they have bought a £100,000 house for £62,500

Blue = Ready cash that is invested or lent
Green = Buyer or investor willingness to pay
Red = Purchase price from market value of renovated homes

£1,000,000
Allowance of tax foregone
Based on the sponsor's certification that the property is placed in service
The RDA issues a £1,000,000 tax foregone certificate (IR form)
Which the investor attaches to its tax return
(Along with the original £1,000,000 allocation chit)
And is able to claim £1,000,000 off taxes payable to Inland Revenue
The investor has no ongoing risk of the properties
Inland Revenue has paid out cash only upon success!

Light blue = tax foregone
Orange = Allocation chit of HART Credits