BSPRA: Builder and Sponsor Risk Allowance. BSPRA is a credit for two items not usually financed by FHA-the Developer’s fee (which is never a financeable item) and the Contractor Profit. FHA knows that both of these items must be accounted for in the 221 (d) loan, and does so by giving the deal a credit for these items in the stack of costs for the deal. These loans are not based on value but on a loan to cost basis. Say, the hard and soft costs are $9,000,000 and the Land Value is $1,000,000. If BSPRA is activated by an Identity of Interest between the borrower and the General Contractor, then the BSPRA amounts to 10% of the hard and soft costs, or $900,000 in this case. The costs then amount to $10,900,000. By adding BSPRA, FHA recognizes the costs to be fully incurred and provides an avenue for the costs to be paid outside of the loan, either from partnership proceeds or from subordination by the Developer and/or Builder. Either way, the cash required for the loan is significantly reduced, as BSPRA is a dollar for dollar reduction in the equity requirement.
SPRA: Sponsor’s Risk Allowance. When there is no Identity of Interest between the Sponsor (think of the Developer/borrower) and the Builder, the B in BSPRA is gone and the loan is left with SPRA. This is not the typical approach to an FHA loan because the credit is limited to 105 of the architect’s fees, carrying and financing charges, legal organizational and audit expenses. The leverage is hurt on this approach even if the contractor profit is paid inside the loan (as it is not paid inside with BSPRA).
Identity of Interest: While the Identity of Interest is typically a small ownership interest in the property by the General Contractor, that is often purchased after initial close, it is not the only recognizable interest. Interlocking officers or directors can generate the interest, for example.
Capitalization Rates: Cap rates show the rate at which the net operating income reduces the cost or value of a property. If you have $100,000 in NOI and the value is $1,000,000, then the cap rate is 10%, with one tenth of the value or costs being repaid each year. If the NOI is $111,111, then the cap rate is at 11%. If the NOI is $90,000, the cap rate is approaching 9%.
Curtail Rate: FHA loans refer to a curtail rate. This is a specific term to describe the curtail of the principal by the amortization that takes place each year. While it is usually quoted as of the first year, it is an important element of the Debt Service constant.
Debt Service Constant: The elements of a fixed rate loan’s debt service constant are interest, principal reduction (amortization or curtail) and in the case of an FHA loan, the Mortgage insurance Premium. The debt service remains constant throughout the term of the loan but the character of the payment changes, as principal slowly increases and interest slowly decreases. The percentage of MIP is figured each year and applied throughout the year.
223(f): The 223 (f) program is the FHA loan program for existing properties requiring no more than moderate rehabilitation. The loans are fixed rate, assumable, non-recourse, fully amortizing, typically over a 35 year term. The loans are used for cash out mortgages, sales, refinances and for properties needing moderate rehabilitation or just a freshening.
221(d)4: The 221 (d) 4 program is FHA’s program for New Construction and Substantial Rehabilitation. The loan offers up to a 2 year construction term that rolls over into a permanent loan that is fixed, rate assumable, non-recourse, fully amortizing for a 40 year term. The loans allow for conversion or rehab of existing structures into apartments and for new construction of apartment units. In a sub rehab property, the existing improvements are excluded from the land value, making it similar to new construction loan which only covers the land in the legal description.
HUD/FHA/GNMA: FHA and GNMA are the agencies under the Cabinet Department of Housing and Urban Development. Generally, FHA provides a commitment to insure a loan under the Full Faith and Credit of the United States. Further, GNMA is the typical way of executing the commitment into cash for the mortgage, by the lender issuing securities (“Ginnies”) which are sold to generate the cash for the mortgage. FHA provides the insurance, Ginnie Mae provides the cash.