BSPRA and HUD Multifamily Construction Loans
BSPRA, or Builder Sponsor Profit & Risk Allowance, is an additional 10% FHA 221(d)(4) loan credit. Sometimes referred to as "paper equity," it can be added to the calculated replacement cost of the property. Specifically, BSPRA is calculated by taking 10% of the "hard costs" of the project (which does not include the land) added to the total development costs.
As a result of the BSPRA process, the builder contributes their profits for a degree of equity in the development. This ties the interests of the developer and the builder together by giving the builder a stake in the project. This makes it in the builder's best interests to complete the project on-time and on-budget.
Why BSPRA is Popular for Multifamily Development
By increasing the total development costs of the project (based on 85% LTC), BSPRA reduces the amount of cash required at the project closing, sometimes by 3-4%. And, while that may not sound like much, it can add up, especially on larger developments. In some cases, that added leverage may even negate the need to bring on an additional equity investor into the project, which can be a big plus for many developers.
Pros and Cons of BSPRA
While BSPRA can reduce the amount of cash needed at closing, it may not be right for every HUD multifamily development project. Due to the fact that monthly debt payments will increase, it will reduce a development's monthly cash flow, which may or may not be acceptable, depending on the individual project.