How Will the HART Credit Function?

How Will the HART Credit Function?

Quick summary of the HART Credit in practice

HART Credits are capitated (finite allowance each year), allocated (through regional allocating bodies), and competed for (many sponsor vie for award, only the best receive it). These features control government expenditure and allow both precise targeting and virtuous-circle evolution.

An eligible sponsor developing an eligible property secures an allocation of (future) HART Credits from a government allocator (e.g. the RDA or EP) via a competitive process. The sponsor then factors the allocation (sells it for cash) to an investor (probably a large tax-paying financial institution) and uses that cash as soft equity gap funding to develop or regenerate the property. Once the property is fully developed and placed in service, the allocator issues a HART Credit credit chit that the investor attaches to its tax return. The HART Credit is thus a pound-for-pound reduction in taxes payable.

Eligibility: Property, sponsor, tenures, recipients

Eligible Property

Properties must be within target areas (e.g. distressed post codes, neighbourhood renewal areas, areas of affordable housing shortage) consistent with public-policy goals of affordability or urban regeneration, as identified by local government within their regeneration strategy.
Within these target areas, three types of property (existing or new-build) are eligible:
1. Residential homeownership. Includes live-work and shared ownership.
2. Residential rental.
3. Retail (ownership or rental). Mixed-use development is enabled and encouraged.

Eligible sponsor

Developers (whether for-profit or non-profit, taxpaying or charitable) of real property.
Public-private partnerships combining a developer and a public entity in some legally binding configuration.
Small property owner-occupants who are renovating existing property in the neighbourhood (SPO).

Developers include teaming among sponsor/developer groups.

Eligible tax credit recipients

Sponsor, or
Unrelated investors who are Allocator-approved transferees.

Small property owner

As an investment vehicle, the HART Credit requires investment scale and investor sophistication. Yet within urban regeneration areas are many entrepreneurial families and individuals who would be unable to access a syndication-sale model of HART Credit.
Accordingly, the HART Credit will also provide a small property owner (SPO) alternative: owner-occupants who spend a minimum capital investment will receive income tax rebate economically equivalent to the HART Credit. Details are specified below)

Sequence and mechanics

Application/ award: Allocation Strategy

Every year, each Allocator will publish its prospective overall allocation goals, annual allocation plan, and scoring rules for selecting among applications (collectively, "Allocation Strategy").
Allocation Strategies will be publicly available (via the Web) and stakeholders will be invited to comment.
Revised regional Allocation Strategies will be approved by HM government ("Central Government"), probably Housing Corporation and ODPM.
In neighbourhood renewal areas needing urban regeneration, HART Credits will likely be used to close financing gaps. In areas of affordable housing shortage where the challenge is affordability (now and over time), HART Credits will likely be used to create long-term affordability.

Allocation cycles throughout the year

At intervals throughout the year, each Allocator will independently allocate portions of its HART Credits, selecting the best proposals based on its Allocation Strategy.
If an Allocator does not allocate its full amount by December, excess is recaptured and redeployed via a national pool.
Sponsors will compete for awards: an ideal level of competition would be roughly 200% competition (50% of applications awarded).

Capitation and allocation formula

At the national level, HART Credits will be capitated at £5.00 annually per head (£250 million) increasing annually (from 2004) by RPI.

Allocation formula

HART Credits will be allocated regionally by entities ("Allocators") expected to be the 9 RDA's (alternatively, English Partnerships).
Using these figures, each region will have an allocation equivalent to about £28 million. Allocation will be per-capita among the regions based on their current population in the 88 Deprived Areas.
As Deprived Areas change from time to time, allocation levels change among regions. Those with more Deprived Areas will receive proportionately larger allocations.

Application threshold criteria

Any sponsor's application must include thresholds elements:

Resolution of support from local government.
Planning permissions being in place.
Site control .
Performance readiness (ability to begin construction, financing commitments, sponsor organisational capacity, and development timetable).

Awards will be made from a service-year allocation, spent as earned.

HART Credit amounts per property

The actual HART Credit earned by any property will be calculated as a fixed percentage of Total Development Cost (TDC).
Permissible multiplier-percentage ranges will be established by enabling legislation; annual percentage award levels will be reset (within the legislatively enabled range) by Central Government.
The HART Credit will be payable in three annual instalments:

For owner occupation for sale, 17% per year.
For rental, 25% per year.

Allocators may elect, in their Allocation Strategy, to give scoring points for proposals that request lower percentages. Over time, and in a more competitive marketplace, this will promote greater HART Credit efficiency.
A bonus multiplier (150% of HART Credits otherwise allocable ) will be available for historic properties within total development scheme.
Clawbacks assure performance and prevent windfall profits.

Delivery interval

Three years, starting with the year the property is placed in service (completed and occupied or sold, as the case may be).

Converting HART Credits into tax savings: timing

The HART Credit is earned (see below) when property is placed in service.
When earned, the HART Credit flows to the eligible HART Credit recipient .

Converting HART Credits into tax savings: mechanics

When the property is complete and use-compliant, the Allocator will issue a voucher chit that the eligible HART Credit recipient attaches to tax return to Inland Revenue. (If SPO is not a taxpayer, converts into a cash rebate from Inland Revenue.)
The recipient's taxes due Inland Revenue are thus reduced pound-for-pound .
The HART Credit recipient need not be attached to a continuing ownership entity.

Small Property Owner (SPO) participation

The small property owner (SPO) receives credits in the form of income tax rebate (in an amount HART Credit, pound-for-pound).
The SPO rates rebate will be handled as a matter of right, not competed through the Allocator.
Or, if the recipient is not a sufficient tax payer, in the form of a direct cash rebate from Inland Revenue.

Converting HART Credit awards into cash: market mechanism

Neither allocation of a HART Credit nor the HART Credit award upon completion represent actual cash that can be used to develop the property. Cash is derived by selling the future rights to receive HART Credits to investors, for a price equal to some discount from the expected future HART Credit.
Up-front prices for HART Credits will be established through market competition and market forces. When the programme debuts, initial prices are expected to be relatively low , rising over time as the programme becomes better known and more widely used.

Why do HART Credits sell at a discount (less than par)?

Even in a stabilised market, HART Credits will sell at a discount, established through market competition. Investors will be seeking an effective annual yield-to-maturity calibrated to (a) the time interval at risk (between investment and HART Credit delivery), (b) alternative investments in the financial markets and (c) perceived long-term risk .
Compared with a grant-based approach, HART Credits are pay-for-performance, a significant benefit to government. With a HART Credit Discounts from face HART Credit can also be seen as the cost Central Government pays to transfer development/ performance risk to the private sector.
The private sector takes all the performance risk if the property is never completed, government never pays. Further, the private sector will enforce performance accountability. If the sponsor encounters difficulties, the HART Credit investor will intervene long before government could.
Private sector competition will also stimulate professionalism and capacity-building among sponsors, since those that fail market criteria will be unable to sell their HART Credits competitively.

Transferability

As a general rule, HART Credits need not be liquid: they will be consumed by their original investors . (Allocator approval of the investor will be required at the time of initial investment.)
Later transfer could be permitted but only with prior Allocator approval.

Capitation and allocation formula

Allocated among regions per-capita based on the current population in the 88 Deprived Areas.
As Deprived Areas change from time to time, allocation levels change.
If an Allocator does not allocate its full amount by December, the excess is recaptured and redeployed by March of the year following via a national pool.
Allocators with greater needs or better-developed development capacity will have contingency applications ready to award recaptured HART Credits.

Targeting

Can target Deprived Areas via local government regeneration strategies.

Annual funding amounts and impact analysis

National scaling

£5.00 per head (£250 million) increasing annually (from 2004) by RPI.
Equivalent to about £28m per region.

Impact

Expected to fund ±10 schemes per region per year (will vary with property/ scheme average size; can be scaled differently in different regions).