BSPRA Fof The 221 d4 FHA Loan
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BSPRA - Builder's and Sponsor's Profit and Risk Allowance




Project Equity Funding Suggestions

When developing a housing project using a 221(D) program some cash or equivalent equity is required. One way to offset some of the required equity is to utilize the allowable BSPRA program as described below. The BSPRA program allows for the equity requirement to be reduced by up to 10%; however the contractor must have an identity of interest in the project by acquiring a small percentage of ownershipof the project.

Typically that interest is purchased back under the terms of a separate agreement for a lesser amount than the beneficial 10% equity reduction. Separate from, and in addition to the contractor fee would be a developer fee that is also not allowed to be included in the mortgage when utilizing BRSPA.

The cost of the contractor and developer fee as well as other equity requirements must be considered when developing a 221(D) project. There are many creative ways to stack the funding and equity requirements when utilizing a government funded or insured development program. A few suggestions have been outlined below when determining how to fund any need equity.

1. Leverage Land Value – If the land for the development is purchased or mortgaged for less than the appraised value, then 83% of the equity can be applied toward the required equity. 2. Private Capital Broker- A capital broker can be employed to seek private funding from outside sources to invest in the development by helping to fund the equity. The investor would generally require a preferred return on their investment.

3. Line of Credit – The project owner could seek to establish an operating line of credit secured by other assets to help fund equity. The line of credit could be serviced by the projects cash flow. In addition to utilizing the BSPRA program the suggestion above could be used to help raise capital for items that need to be funded outside the mortgage.

FHA limits mortgage amounts to profit motivated developers of new construction and substantially   rehabilitated properties to 83% 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  he 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.

BSPRA means the developer and contractor are waiving of the builders profit or BSPRA in lieu of cash equity. By waiving BSPRA there is no allocation within mortgage proceeds for the payment of a contractor's profit. If the contractor is not actually the developer, and the identity of interest is created as outlined above, it unlikely that the contractor would be willing to waive his profit.

In some cases, the contractor is willing to accept a "piece" of the project in lieu of his profit. Where a contractor requires that his profit be paid, only a portion of BSPRA may be waived, or the profit must be paid from other than mortgage proceeds and by someone other than the owning entity.

This is typically accomplished by the use of a "side agreement" wherein the general partner or partners of the owning entity agree to pay the contractor’s  profit based upon a completion schedule, i.e. at 25% completion, 25% of the contractors profit is paid. The payments under the side agreement can be unsecured or secured by assets other than the project. The major advantage of the side agreement is that the contractor's profit is paid during the course of construction, rather than effectively being put up with the mortgagee prior to the start of construction.

If the contractor insists that his profit be including within the mortgage proceeds and the contractor is unwilling to create an identity of interest necessary to qualify for BSPRA, all is not lost. FHA has another category of allowed cost called SPRA. SPRA Stands for Sponsor's Profit and Risk Allowance, Of course! In a transaction in which you have SPRA, a contractor's profit would be included in allowed costs and paid from mortgage proceeds. SPRA would be equal to 10% of all costs with the exception of land, contingency reserve and construction costs.

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.

See BSPRA Agreement form.


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