BSPRA BSPRA (Builder’s and Sponsor’s Profit and Risk Allowance) is a credit or allowance added to certain multifamily housing projects in order to recognize the time, effort, and risk for the mortgagor-owner in developing the project. This credit or allowance is authorized by housing legislation and is included in the costs for certain projects in which the owner and contractor have an identity of interest (which may be as small as a token amount). Including BSPRA in the calculation increases the mortgage amount, which means more cash available for transaction costs. This increase in the mortgage is greater than the amount calculated using a contractor’s fee. The actual results of the calculation are reflected in cash available to the mortgagor on account of land. BSPRA is computed on eligible costs of buildings and improvements excluding the profit fee for the contractor. It is not a balance sheet transaction, but only an amount used in HUD calculations of the maximum mortgage in the commitment to insure the project and then forms HUD-92330 and HUD-92580 at cost certification. In these HUD ventures there is an equity requirement that is partially fulfilled by applying BSPRA to the transaction. To illustrate the effects of BSPRA, take for example, a project that has $1,000,000 of development costs (line 72 of form HUD-92264) plus $100,000 for land. The construction contract is $815,000, which includes a profit fee of $50,000. (This presentation assumes that cost is controlling and a 90% LTV in criterion 3 of form HUD-92264-A.) Without BSPRA the mortgage would be $990,000 (90% x $1,100,000), and the required mortgagor’s investment would be $110,000. The investment would be all cash unless there was equity in the land. In these calculations, there would be a $10,000 front money escrow requirement plus the cost of the land. The contractor’s profit-fee of $50,000 would be paid from mortgage proceeds. With BSPRA the contractor’s fee is excluded, but there is a 10% add-on to the remaining development costs ($1,000,000 - $50,000 = $950,000 x 10% = $95,000 + $950,000 = $1,045,000) plus $100,000 for land. The mortgage would increase to $1,030,500 ($1,145,000 x 90%) and the equity investment would be $114,500. However, applying the BSPRA credit of $95,000, the owner’s cash requirement would be only $19,500 over any deal with the contractor, which is $50,000 in this instance for a total equity requirement of $69,500. Including BSPRA in the cost of the project increases the basis for calculating the mortgage, so the mortgage increases, which produces more cash to pay the bills. In this case, BSPRA generates an additional $40,500 in cash for the mortgagor ($110,000 - $69,500). (In a real case, some of the costs based on a percentage of the mortgage would change slightly, but are not included here in order to avoid a distraction. Also, this case is based on a contractor’s fee of 6.54%, which, if altered, would change the results.) The effect of BSPRA is best illustrated through changes in excess mortgage proceeds. Without BSPRA there is a front money escrow of $10,000, albeit the $50,000 for the contractor’s fee is included in this computation for a net difference of $40,000. With BSPRA excess mortgage proceeds are $80,500, which the developer can use towards the land, OR if there is equity in the land, pay the contractor the $50,000 profit-fee. ($80,500 - $40,000 net difference in cases without BSPRA = $40,500 additional cash to mortgagor) Considering land as equity, without BSPRA cash required is $110,000, but with BSPRA, it is only $69,500. If there were no identity of interest to qualify the project for BSPRA, the project would be eligible for SPRA (Sponsor’s Profit and Risk Allowance), but that would generate only $16,650 of additional mortgage proceeds instead of $40,500. In SPRA cases the 10% is applied only to development costs without the construction contract. Also, the developer would lose the difference between 10% of the construction contract and the profit percentage. The aspect not addressed in most BSPRA deals is the profit-fee paid to the contractor. This payment is made in side deals in which HUD does not normally get involved. The way to avoid entanglement in the collateral agreements and allow developers to pay the contractor’s profit-fee is to process projects eligible for BSPRA as SPLIT-BSPRA. In essence, SPLITBSPRA allows some of the mortgage proceeds generated through BSPRA to be Paid In Cash. This will either take cash out of or add a cash requirement to the transaction; however, the net effect will not be any different than the current side deals, but the confusion and some uncertainty for contractors could be eliminated. The concept of Split BSPRA is based on a standard business practice in which the builder says to the mortgagor, “I will build the project for a fixed fee plus a percentage in the project.” The percentage may be nominal to substantial, but whatever it is, the percentage or other relationship between mortgagor and contractor creates the BSPRA relationship and entitles the mortgagor to full BSPRA. Rules for cost certification read that BSPRA is cost certifiable whether or not paid in cash. Releasing excess mortgage proceeds on a percentage of completion recognizes the value of construction progress similar to releasing excess mortgage proceeds for off-site improvements. The funds for off-site improvements are not released until value to the project is obtained. Percentage of construction completion is value to the project. Split BSPRA brings the side deals or collateral agreements inside the mortgage transaction. To process Split BSPRA, the HUD processor/reviewer (Valuation) ignores the profit line item and calculates BSPRA and the mortgage amount in normal fashion. The processor/reviewer then adjusts (reduces dollar for dollar) BSPRA by the amount of the profit fee. The only effect that such calculation has on the whole process is to reduce excess mortgage proceeds by the amount of the profit-fee, which may create a front money escrow. The total development costs would not change since BSPRA is just being reallocated. What is a Front Money Escrow and how is it calculated? What are Excess Mortgage Proceeds and how can such funds be generated? The answer is related and simply whether there are sufficient mortgage proceeds to fund the construction and related soft costs of the project. A simple way to compute the response is to start the financial requirements for closing with the mortgage amount less development costs to be paid in cash. (See the revised form HUD-2283 included in the case study for an illustration.) If there is a shortage, a front money escrow results, which requires that such funds be spent prior to mortgage proceeds (unless the funds are eligible for pro-rata treatment). If the mortgage proceeds exceed the development costs, then these are excess mortgage proceeds that are used toward purchase of the property, return of investment in property, escrows or other items (according to a handbook priority allocation process). These funds could go toward paying the contractor’s profit fee, as well, once the land equity is satisfied.