Raising equity in any real estate deal is a hurdle that must be successfully navigated to find success. Equity investors make many real estate deals possible when the equity requirements exceed the sponsors capabilities or risk tolerances. Conversely, increasing leverage means using less “raised equity” so the sponsor retains more profit and ownership.

Accessing the highest leverage percentages in the industry is very attractive to developers, because they want to preserve cash for their next project. This is usually one of the key drivers for using FHA commercial multifamily financing programs. For a market-rate project, the FHA 221(d)(4) program allows for up to 85% LTC (loan-to-cost). Developers that understand how to use BSPRA, know it can have the effect of reducing the cash required to close by about 3 – 4%. That might not seem like much, but an effective increase in leverage can eliminate the need for equity investors that a low leverage construction loan would require.

BSPRA stands for Builder Sponsor Profit & Risk Allowance. In the simplest terms; BSPRA is “paper equity” which is contributed to the project for the express purpose of reducing cash at closing. Because FHA wants successful projects, tying the interests of the general contractor and the developer together makes good business sense. The builder contributes their profit on the project in exchange for some ownership in the project. The BSPRA calculation is 10% of the hard costs of the project (excluding the land) which is added to the total development costs.

Raising total development costs allows for a higher loan amount based on the 85%LTC, the addition of the paper equity (BSPRA) reduces cash at closing and has the effect of adding 3 – 4% of additional leverage when compared to the pre-BSPRA total development costs.

For the technical readers out there, the HUD MAP Guide defines BSPRA as:

BSPRA is always 10% of replacement cost not including land, but is itself not an actual cost or fee to be paid to the identity of interest general contractor and/or development entity (sponsor). It is used to calculate the mortgage amount in Criteria 3(85% LTC). Its effect is to allow the identity of interest borrower/developer/contractor to contribute its presumed builder/developer profit (BSPRA) as equity whenever the mortgage amount is limited by Criteria 3. In a balanced summation of sources (loan proceeds, equity, etc.) and uses (costs of land, development, construction, capitalized interest, etc.) this presumed profit or BSPRA is added both to uses and sources. When Criteria 3 prevails, the mortgage amount will be a fixed percentage of costs.

The Identity of Interest is the agreement, detailing the interest (or ownership) of the general contractor in the project. It’s a requirement for the inclusion of BSPRA on a 221(d)(4) loan. The following are quoted from the HUD MAP Guide:
An identity of interest is construed to exist when:

1. There is any financial interest of the borrower in the general contractor or any financial interest of the general contractor in the borrower.
2. Any officer, director, or stockholder or partner of the borrower is also an officer, director or stockholder or partner of the general contractor.
3. Any officer, director, stockholder, or partner of the borrower has any financial interest in the general contractor; or any Officer, director, stockholder, or partner of the general contractor has any financial interest in the borrower.
4. The general contractor advances any funds to the borrower.
5. The general contractor supplies and pays, on behalf of the borrower, the cost of any architectural services or engineering services other than those of a surveyor, general superintendent, or engineer employed by a general contractor in connection with its obligations under the construction contract.
6. The general contractor takes stock or any interest in the borrower corporation as consideration of payment.
7. There exists or comes into being any side deals, agreements, contracts, or undertakings entered into or contemplated, thereby altering, amending, or canceling any of the required closing documents, except as approved by the Secretary. 
8. Any relationship (e.g. family) existing which would give the borrower or general contractor control or influence over the price of the contract or the price paid to the subcontractor, material supplier or lessor of equipment.

BSPRA isn’t right for everyone and that is why we quote a BSPRA & non-BSPRA scenario for virtually all the multifamily development deals we work on. It’s helpful for our clients to compare both alternatives side by side. Also, it is good to be aware that one consequence of using BSPRA is that while it does reduce the cash necessary to close the deal, it does reduce monthly cash flow because the debt payments are higher. Ultimately BSPRA is a unique aspect of the FHA 221(d)(4) multifamily new construction loan program that can be another significant benefit to the developer looking to preserve as much capital as possible when building new projects. Higher leverage construction-to-permanent loans preserve cash to be deployed on future projects.