The financing sequence, step by step

The HART Credit financing sequence is often best illustrated via an interactive role-playing, where each individual is assigned a particular role: Sponsor, Investor, Financier, Home Buyer (consumer), Allocator (RDA or EP), and Inland Revenue (source of HART Credits). Then the eight steps are illustrated by using a script that moves among the participants, step by step, as the property development moves forward.

Step 1: Allocation

The Allocator announces availability of HART Credits, publishes its Allocation Strategy, and receives applications.

In financing terms, Inland Revenue has allocated HART Credit chits to the RDA.

Step 2: Award

Using its Allocation Strategy, the Allocator selects the best-scoring proposal and awards its sponsor the HART Credit allocation.

The sponsor now has a chit demonstrating a pledge of future HART Credits if the property is completed.

Step 3: Debt financing

With the HART Credit chit in hand, the sponsor secures the remainder of its financing (e.g. construction, permanent loan commitments, its own equity).

The sponsor now has its debt and equity sources, but must still convert the HART Credit chit to development cash by selling it to an equity investor.

Step 4: Equity raise

Debt financing in hand, the sponsor approaches equity investors (e.g. large tax-paying financial institutions) and raises the needed gap equity.

The investor will earn HART Credits only when the property is successfully completed; thus, the investor will monitor sponsor performance and intervene if necessary.

Step 5: Construction or rehab

Having now completed its initial capitalisation, the sponsor now develops, constructs, or rehabilitates the property.

The sources of funds are spent and go into improved real estate.

Step 6: Completion and sellout

With completed properties, the sponsor now completes the permanent financing: sale to homeowners, rental and refinancing with institutional sources, or otherwise.

Construction financing is paid off and permanent financing put in place.

Step 7: HART Credits earned

The property complete, the sponsor so certifies. The Allocator (RDA) confirms that it has been 'placed in service and authorises issuance of the HART Credit claim form.

The sponsor now has the HART Credits and forwards them to its investor.

Step 8: Investor cashes HART Credits

The investor now attaches the HART Credit claim form to its tax return and reduces its taxes otherwise payable pound-for-pound by the HART Credits.

The transaction is complete.