BSPRA - Builder's and Sponsor's Profit and Risk Allowance
It Stands for WAIVING BUILDERS AND SPONSORS PROFIT
HOW DOES IT HELP A DEVELOPER?
FHA limits mortgage amounts to profit motivated developers of new construction and substantially rehabilitated properties to 90% of FHA recognized costs. This creates a hard equity requirement of not less than 10% of costs. However, when Congress enacted the 221(D) program it wanted to encourage contractors to develop more FHA insured apartment properties. In order to accomplish this goal, the 221(D) multifamily program, under certain conditions, will recognize as a "cost" Builder's and Sponsor's Profit and Risk Allowance (BSPRA), in lieu of a contractor's profit.
Typically, a contractor's profit would be limited to 4 1/4 - 7% of the hard construction costs. BSPRA, on the other hand, is 10% of all costs with exception of land value, and contractor/developer, the minimum hard equity requirement is reduced from 10% to approximately 3%. Of course each transaction varies depending upon the dollars involved, but the generally the inclusion of BSPRA will reduce the required hard dollar equity. In order to be eligible for the inclusion of BSPRA in the transaction there must exist an identity of interest between the contractor and the owner. An identity of interest can be created in many ways, but the most frequently used methods are for one of the general partners of the owner to acquire a small interest in the contractor, or for the contractor to acquire limited partnership interest in the owning entity.
Therefore, what would be lost in "recognizable costs" in a SPRA transaction as opposed to BSPRA transaction, would be the difference between the amount of the contractor;s profit and 10% of the construction costs.
FHA 221(d)4 Loan Program
FHA 221(d)(4) >