Commercial Loans Blog

Commercial Loans - Permanent's, Mini-Perms, and Bridge Loans

Posted by George Blackburne on Wed, Sep 26, 2018

shopping centerApart from construction loans, there are three types of commercial loans in first position - the permanent commercial loan, the mini-perm, and the bridge loan.

A permanent loan is a first mortgage on a commercial property with a term of at least five years.  A permanent loan will have some amortization.  While a permanent loan may have a term as short as five years, the payments will be collected as if the commercial loan had a 25-year term.  A twenty-five year amortization is the normal amortization schedule for commercial loans.  If the property is older than 20 years, a bank might even require a 20-year amortization.

 

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Commercial loans with shorter terms are considered either mini-perms (2 years) or bridge loans (1-3 years).  What is the difference between a mini-perm and a bridge loan?

Mini-perms are first mortgage loans on brand-new commercial property that are typically given by the bank to give the sponsor time to develop an operating history.

 

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Example:

Suppose Alpha Bank makes John Hotelier a $10 million construction loan to build a brand new Quality Comfort Inn.  The term of the construction loan was 12 months, and the developer (John Hotelier) finishes on time and on budget.  Alpha Bank would prefer to get paid off promptly at maturity, but the bank is wise enough to know that it is very difficult for a business property, like a hotel or RV park, to obtain a takeout loan until its has a two-year operating history.  (This being said, the SBA might possibly finance a brand new hotel?)

A takeout loan is just a special type of permanent loan.  It looks exactly the same as any other permanent loan, except for the fact that a takeout loan is a permanent loan on a brand new commercial property used to pay off a construction loan.  Therefore every takeout loan is a permanent loan, but very few permanent loans are takeout loans.

 

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By the way, commercial construction loans are almost always made by commercial banks.  The rare exception is that some life insurance companies will sometimes make huge construction construction loans ($20MM+) on trophy properties, like office towers or huge shopping centers. In general, commercial banks like to make commercial construction loans because the loan term on a construction loan is short (12 to 18 months), and the bank gets to earn its points up-front.

Okay, so John Hotelier has just completed his hotel, but in order to qualify for a takeout loan, he needs to establish a two-year operating history.  Fortunately, John had negotiated with Alpha Bank for a two-year mini-perm at the conclusion of his construction loan.

 

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The forward takeout commitment - a mini-perm is a form of forward takeout commitment - cost John one point.  If he chooses to exercise the forward takeout commitment, he has to pay Alpha Bank an additional half-point or one-point fee at the time that the mini-perm funds.

The typical terms of a mini-perm are prime plus 1% to prime plus 2%, twenty-five years amortized, two years due, and no prepayment penalty.

 

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What is a forward takeout commitment?  A forward takeout commitment is just a letter from a bankable lender promising to deliver a takeout loan at some time in the future, assuming the developer has achieved certain things.  In John's case, those conditions were that he complete the project according to plans and specifications.  What was NOT a condition was the requirement that the hotel achieve a certain occupancy rate.  That's the whole purpose of the mini-perm commitment - for John to have time to open the hotel and start to increase his average occupancy rate.

Now third type of first mortgage (quite possibly a second mortgage) is the bridge loan.  A bridge loan is a commercial loan, usually with interest-only monthly payments, with a term of one to three years, which gives the borrower time to accomplish certain things, such as leasing out the property, renovating the property, or selling it.

 

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So what the difference between a mini-perm and a bridge loan?  Mini-perms are almost always secured by brand new commercial property, and their interest rates are bank rates.  Even the cheapest bridge lender has rates that are 2% to 3% higher than those of the bank.

 

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Topics: Mini-perms