What is a ‘mini-perm’ loan, how do they work, and how can you get one?
A ‘mini-perm’ loan is a type of commercial real estate loan typically used for interim financing and it can be a key tool used for acquiring investment properties and in real estate development. They are available for a wide variety of uses and property types and provide critical flexibility for investors.
Why a Mini-Perm Loan?
A mini-perm loan provides short term financing and normally acts as a type of bridge loan prior to taking out a long term fixed rate mortgage.
Most commonly this type of loan is used to pay off a construction loan and fills in the gap until attractive longer term funding can be secured. This is contrasted with construction-perm loans which generally roll over from funding construction into a regular mortgage, but which have become far more difficult to obtain today.
A mini-perm gives investors and developers the ability to pay off construction financing and establish performance history, as most permanent lenders today do not have a big appetite for unproven properties.
Using a Mini-Perm to Capitalize on the Current Market
These mini or semi-permanent commercial mortgage loans can be used very creatively in the current market environment to take advantage of many different types of opportunities.
Traditionally they may provide a stepping stone for constructing and operating income properties such as office buildings, industrial parks, retail shopping centers and multifamily apartment buildings. Once construction is complete, a mini-perm is taken out for several years until property performance and income can be established. This is then replaced by a permanent loan unless the property is sold in the interim.
However, today real estate investors are also coming across a wide variety of other appetizing opportunities that don’t fit the mold of other loan types. This type of leverage can be used to develop land, take on an income property that is under performing and ‘lease up’, and even take out distressed debt and non-performing notes with a new cash injection for scooping up discounts and bargains.
Once the income from these properties is stabilized and improved, lenders will offer better terms and rates on end loans or they can be turned over with significant value and profit added.
Mini-Perm Loan Terms & Qualifying
So how easy are mini-perm loans to get in the current lending environment and what types of terms should borrowers expect to find?
Mini-perm loans normally run 3 to 5 years. However, there are sub-types split between ‘hard’ and ‘soft’ loans. Hard have a firm balloon date which is normally no more than seven years out, with payments based on a 20 to 25 year amortization. Soft loans may have longer terms but with strong incentives to pay off the loan early. Other options may include interest only payments and non-recourse loans.
Obviously exact loan-to-value (LTV) and rates will depend on the quality of the building, experience of the management, credit worthiness, and property type. Right now rates are incredibly attractive but much rides on matching your loan to a lender that has a strong appetite for your type of deal. If you need help building a cash flow projection for your loan package, give our online commercial real estate analysis software a try, free for 30 days!