What is BSPRA?
Builders and Sponsors Profit and Risk Allowance (BSPRA) is a financial metric allowed by government-sponsored housing programs that lets developers include a certain percentage above the actual cost of apartments in the total project cost calculation. This additional allowance is included for the purposes of determining the loan amount that can be granted. Essentially, BSPRA provides a cushion for builders and sponsors, covering their profit and risks associated with the project.
How BSPRA Works
The total project cost includes the actual cash cost of development along with a BSPRA, which is usually calculated as a percentage of the construction cost. Government-sponsored programs then use this enhanced project cost figure to determine a more substantial loan amount, meaning the developer needs to provide less upfront equity.
Example: Application of BSPRA
Let’s say the actual cash cost to the developer amounts to $1,827,272 (including the project cost and land cost). A BSPRA of 10% is applied to the project cost, thereby reducing the required cash equity significantly.
Table 7: Effect of BSPRA Upon Loan Amount
| Cost Component | Amount |
|---|---|
| Project Cost | $1,727,272 |
| BSPRA Allowance of 10% | $172,728 |
| Land Cost | $100,000 |
| Total Cost | $2,000,000 |
| Loan at 90% of Total Cost | $1,800,000 |
In this scenario, the project cost receives an additional BSPRA of $172,728, reducing the necessary cash equity to just $27,272 out of a total loan amount of $1,800,000.
Frequently Asked Questions (FAQs)
1. How is BSPRA calculated?
BSPRA is determined as a percentage of the project cost, allowing builders and sponsors to include this in the total project cost.
2. Can BSPRA vary across different programs?
Yes, the BSPRA percentage can vary based on the guidelines of the specific government-sponsored housing programs.
3. Does BSPRA affect the developer’s profit margin?
Yes, BSPRA indirectly boosts the developer’s profit margin by allowing a larger loan amount, thus reducing the personal equity invested.
4. Are there any eligibility criteria for BSPRA?
The eligibility criteria for BSPRA depend on the specific guidelines of the government-sponsored program. Typically, they involve the type of project and compliance with regulatory standards.
5. Is BSPRA included in the final project cost reported to investors?
BSPRA can be part of the final cost reporting, but it is essential to clarify this with investors and stakeholders based on transparency and honesty.
Related Terms
Project Cost
The total expenditure incurred in developing a property, including materials, labor, and overheads.
Equity
The amount of capital or monetary investment put into a development project by the developer or investor.
Loan-to-Value (LTV) Ratio
A financial ratio that compares the amount of the loan to the appraised value of the property, usually expressed as a percentage.
Government-Sponsored Programs
Various initiatives backed by the government aimed at supporting housing development projects, often with financial incentives and relaxed lending norms.
Online Resources
- HUD - Information on housing programs managed by the U.S. Department of Housing and Urban Development.
- Federal Housing Administration (FHA) - Government agency providing mortgage insurance and loan programs.
- Urban Land Institute - Resource for insights and data on real estate and urban development.
- Investopedia - Articles and insights into real estate and financial terms.
References
- U.S. Department of Housing and Urban Development. “Real Estate Terms and Concepts.” HUD, 2023.
- Federal Housing Finance Agency. “Guidelines on Builder and Sponsor Programs.” FHFA, 2022.
- National Association of Home Builders. “Understanding Project Financing.” NAHB, 2021.
Suggested Books for Further Studies
- “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
- “Principles of Real Estate Management” by David M. Geltner and Norman G. Miller
- “The Real Estate Wholesaling Bible” by Than Merrill
