What are Mini Perm Loans in Commercial Real Estate?
Mini perm loans are generally used to finance an income-generating commercial property that has recently been built, but does not yet have the income to qualify for permanent financing. In essence, the loan allows the borrower to pay off their construction loan, while giving the property time to generate more income. A variety of property types qualify for mini perm loans, including multifamily apartments, retail, office, and industrial properties. Mini perm loans can technically be classified as bridge loans, but they typically offer somewhat lower interest rates and generally have substantially longer terms.
What are the Terms for Mini Perm Loans?
In most cases, mini perm loans will have terms of between 2 and 5 years, which should give a commercial property more than enough time to reach sufficient occupancy to qualify for a permanent loan from a bank, life company, or CMBS lender. Some mini perm loans are interest-only, which can be ideal from a borrower’s perspective, especially since the property may not be generating much income yet. In other cases, mini perm loans may have 20 or 25-year amortizations. In certain cases, mini perm loans may have terms longer than 5 years, but these often have ‘incentives’ to encourage borrowers to pay them off earlier, rather than later.
These longer-term mini perm loans can be divided between hard mini perm loans and soft mini perm loans. Hard mini perm financing has a hard 7-year balloon date, after which the borrower must pay off the principal or default, whereas soft mini perm financing may carry longer terms (say 10 years+), with increasing incentives to pay off the loan. While some mini perm loans may be non-recourse, non-recourse mini perm financing is generally only reserved for well qualified borrowers, and may come with higher interest rates.
Mini Perm / Construction Loan Combinations
Many mini perm loans are issued by banks, which sometimes offer them in conjunction with commercial construction loans. These are referred to as construction/mini-perm combos, and can be planned for before the closing of the initial construction financing. Banks often charge a 1% fee for offering a mini perm commitment at this stage, but this can be well worth it for commercial borrowers who want to ensure that their property will be financed from day one.