FHA 221(d)(4) loans have unique advantages including a non-recourse 40 year term and high LTC. The long term nature of the loan helps guarantee that a 221(d)(4) project can weather changes in economic cycles.
One key advantage of HUD’s 221(d)(4) loan is BSPRA, (Builder and Sponsor Risk Allowance), At first, many developers have trouble understanding how BSPRA impacts FHA new construction financing. In most cases HUD does not allow a Developer to obtain a developer fee profit in the loan. BSPRA is an imputed equity credit added into the costs of the 221(d)4 loan to recognize two costs that will not be paid inside the loan: 1. Developer/sponsor profit 2. Contractor profit.
The basis for BSPRA is to provide an incentive for developers to receive payment for taking on construction risk. FHA decided to give a flat fee of 10% of the hard and soft costs to the Builder and Sponsor, whenever each was at risk for their fee.
There is no doubt that BSPRA increases the leverage of the transaction by adding 10% to the hard and soft costs to the payment. BSPRA recognizes a cost that is not paid inside the FHA loan. With FHA financing understanding this key acronym is key to funding your project with low equity requirements.