Mini-Perm Loans Defined and Explained
A mini-perm loan, sometimes referred to as an MP loan, is a type of short-term commercial real estate loan used to either pay off a construction loan during a property’s lease-up phase or to acquire property before the property is fully leased. A mini-perm loan can be considered a type of a bridge loan, as it serves as a bridge between higher-interest construction financing and longer-term, lower-cost financing for a fully stabilized, profitable property.
Mini-perm loans are utilized in this situation because lenders will generally not offer permanent loans to properties that are not fully stabilized and profitable, as represented by both the occupancy rate and the potential DSCR (debt service coverage ratio) of the loan.
Due to their short-term nature, mini-perm loans generally function as balloon loans, meaning that the borrower must repay the loan in full at the end of the loan’s maturity, typically by refinancing into a permanent loan. However, this is not the case with all mini-perm loans, as we’ll discuss later.
Mini-perm loans can be utilized for all types of commercial properties, including traditional multifamily, mixed-use, retail, office, and hospitality properties. However, they may be more useful for retail properties due to the fact that it may take longer for these properties to become fully-leased up and profitable than, for instance, traditional apartment buildings.
While mini-perm loans are generally used to pay off a construction loan during a property’s lease-up phase or to acquire property before the property is fully leased, they are occasionally used for other purposes, such as land purchases, or refinancing distressed debt, though this is much less common.
In this article, we’ll review everything you need to know about mini-perm loans, including how they differ from permanent loans, construction loans, construction-to-permanent loans, and how they’re sometimes used in public-private partnerships (PPPs).
Mini-Perm Loans vs. Permanent Loans and Construction Loans
Mini-perm loan terms generally last between 3-5 years (with some longer-term loans lasting 10-years. This is in stark contrast to construction financing, which typically lasts between 1-3 years, and permanent bank or CMBS loans, which typically last a minimum of 5-10 years, with a maximum of 25-30 years. Like many construction loans, mini-perm loans are often interest-only loans, at least during the first 1-2 years of the loan’s period. Most permanent loans are not interest-only, though some are.
As previously mentioned, construction financing is the most expensive type of financing due to the high risk of project failure, and generally offers lower LTV/LTC maximums than mini-perm loans. Permanent financing, in contrast, generally provides lower interest rates than mini-perm loans.
Soft Mini-Perm Loans vs. Hard Mini-Perm Loans
A hard mini-perm loan is a type of loan that generally has a maximum term of 7-years. It is considered a “hard” loan because the borrower needs to refinance before the loan’s maturity or face default. This makes it significantly riskier for the borrower. Hard mini-perm loans generally have amortizations of between 25-30 years.
In contrast, a soft mini-perm loan technically has unlimited maturity, though costs increase after certain dates. For example, the interest rate of the loan could increase significantly after the loan reaches the 5-year or 7-year mark. A loan covenant could also be included that most of the project’s income be redirected to repay the loan after a specific date. This strongly encourages the borrower to refinance but does not carry the default risk of a hard mini-perm loan.
This means that, in contrast to most types of commercial real estate loans, there are generally no prepayment penalties for mini-perm, as lenders would prefer that the borrower repay the loan as fast as reasonably possible in order to reduce their risk exposure.
Technically, most soft mini-perm loans have terms of 10-years, but again, exceeding this term will generally not lead to default, just higher interest rates and higher fees. Like hard mini-perm loans, soft mini-perm generally have amortizations of between 25-30 years. In some cases, soft mini-perm loans can be non-recourse, though this is typically only offered for highly reputable borrowers.
To clarify, if a loan is non-recourse, it means that, in the case of default, a lender can only repossess the property to repay the debt, and cannot attempt to repossess the borrower or loan guarantor’s personal property. However, non-recourse loans have exceptions, known as “carve-outs” that allow the lender to go after the borrower or guarantor’s personal property in the case of contract violations like fraud, embezzlement, or intentional bankruptcy.
Mini-Perm Loans vs. Bridge Loans
As we mentioned earlier, a mini-perm loan can be considered a type of bridge loan. However, traditional bridge loans generally have a term of 1-3 years and are often used for renovation purposes, whereas mini-perm loans are typically used for the purchase or refinance of newly constructed properties that are not fully stabilized. Because mini-perm loans are generally issued for new properties, they often come with lower interest rates than traditional bridge loans, but this is not always the case.
Mini-Perm Loans vs. Construction-to-Permanent Loans
Instead of getting a construction loan, building a project, and then refinancing with a mini-perm loan, some investors and developers instead get a construction-to-permanent loan. This is one loan that covers both the cost of construction and provides permanent, lower-cost financing for a specific period after the construction is complete.
Construction-to-permanent loans may be harder to get than mini-perm loans because the lender is betting that the construction goes well and that the building leases up relatively quickly. However, because they involve one closing, instead of two, and guarantee a borrower financing for when their project is finished, construction-to-permanent loans are generally more desirable than mini-perm loans.
Mini-Perm and Construction Loan Combinations
Sometimes, banks or other construction lenders will issue a construction loan with a promise to later provide a mini-perm loan once the project is built and the construction loan’s term is complete. This type of loan is referred to as a construction/mini-perm combo. This arrangement, referred to as a forward takeout commitment, is agreed upon during the closing of the initial construction loan, and generally costs the borrower 1% of the full loan amount.
Mini-Perm Loans and Public-Private Partnership (PPP) Contracts
Sometimes, a mini-perm loan is utilized to develop a project that results from a public-private partnership (PPP), which is typically defined as a long-term partnership between a private party and a government entity that creates a service or asset that achieves a public goal, such as infrastructure development or affordable housing. In some cases, the government entity itself will directly provide the mini-perm loan, but more commonly, they will act as the guarantor for a mini-perm loan provided by a bank or private lender.
In Conclusion: Mini-Perm Loans Can Be Perfect for Pre-Stabilized Properties
Commercial and multifamily real estate development can be risky, and unfortunately, it can be extremely difficult to ensure that a building is fully leased up at the end of the construction process. This makes it nearly impossible to find high-quality, low-interest permanent financing from a bank, CMBS lender, life company, or private lender. This is exactly where a mini-perm loan comes in, and it can be a lifesaver for many investors and developers.
However, mini-perm loans don’t last forever (particularly hard mini-perm loans), many are full-recourse, and they are typically more expensive than permanent financing. Therefore, mini-perm loans should only be used as long as they are needed; until the project is fully leased, and borrowers should generally attempt to refinance into a permanent loan as quickly as possible.