BSPRA Increases Leverage While Reducing Equity for HUD 221(d)(4) Transactions

 

The Builder and Sponsor’s Profit and Risk Allowance (BSPRA) allows for-profit motivated borrowers to reduce their required equity contribution. For developers who want high-leverage, low-equity transactions to invest in other projects to build their portfolios, you may want to consider BSPRA.    

In order to utilize BSPRA, there must be an identity of interest between the borrower and contractor. The most common way an identity of interest is created is that the contractor acquires a limited partnership interest in the mortgage entity, or one of the general partners of the mortgagor entity acquires a small interest in the builder/contractor.

The calculation of BSPRA is 10% of the replacement cost which does not include land. BSPRA is used to calculate the mortgage amount. BSPRA is not a cost or a fee to be paid to the contractor. Instead, the builder/developer/contractor contributes their presumed profit as equity whenever the mortgage amount is limited to Criteria 3, which is 85% loan-to-cost for market rate transactions.

If BSPRA is utilized in the transaction, you won’t be able to pay the contractor through the loan.  That’s because there are many times when there are not enough proceeds to pay the contractor inside the loan. Even with the use of BSPRA, a contractor and borrower may have an agreement of an additional amount paid out of surplus cash or other methods.  

Many borrowers develop, construct, and manage their properties. HUD allows this as long as the identity of interest relationships are disclosed, and that they have prior experience owning and managing HUD projects.

Example of BSPRA’s effects on a HUD 221(d)(4) Transaction

Total cost of development and land $20,000,000
Land Cost $2,000,000
Development costs that include both hard and soft costs $18,000,000
BSPRA amount equals 10% of development costs ($18,000,000) $1,800,000
Initial total cost of development and land ($20,000,000) plus BSPRA ($1,800,000) increases total costs $21,800,000
Maximum loan amount with BSPRA $18,530,000 (total costs of $21,800,000 at 85%)
Maximum loan amount without BSPRA $17,000,000 at 85% LTC which would require $3,000,000 in borrower’s equity
Cash equity with BSPRA
(Total cost of development and land ($20,000,000) minus the maximum loan amount with BSPRA ($18,530,000))
$1,470,000

 

LSG Lending Advisors will work with a lender to provide you with an analysis with and without BSPRA. The HUD FHA approved MAP Lenders that we have relationships with can provide you with various options in which borrowers and contractors have formed identity of interest relationships for BSPRA eligibility.

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