Mini-perm financing is short-term financing typically used to pay off income-producing construction. Or commercial or multi-family properties, usually payable in three to five years. In this case, "perm" is short for "permanent", alluding to permanent financing.
Commercial properties often cannot qualify for long-term, permanent financing until they've established operating histories.
Mini-perm loans, therefore, are used to pay off the construction loans. And bridge the gap until the property can qualify for permanent financing.
During the last year it seemed as though mini-perm financing has tended to be more prevalent in some parts of the United States.
Generally, mini-perm loan financing is used to pay off construction or commercial property loans. Either at the beginning of a particular project or investment. Once a project is producing income, the borrower can begin to look for a more long-term financing solution.
The loan carries a balloon payment at the end of the term. With the anticipation that the loan can then be easily refinanced due to the fact that the property now has an operating history on which to successfully obtain permanent financing.
Listen to Eric Stewart from Atlantic Capital Group describe bridge loans to mini-perms as featured on Real Insights Podcast
There are two types of mini-perm financing available, namely:
- hard mini-perm; and
- soft mini perm.
A hard mini perm is a project finance structure where legal maturity is set typically around 7 years. Forcing the borrower to refinance before maturity or face default.
A soft mini-perm is a structure without this default risk. Where the loan maturity remains long-term but whereby increasing incentives are in place to encourage the borrower to refinance.
Advantages of the hard mini-perm include the obligation on the borrower to refinance. Refinancing would be at prevailing market rates, and the fact that funders will be able to price on a short-term basis which also allows the repayment of their upfront fees over a shorter period.
Risks
The main disadvantage is of course the introduction of default risk potential for all parties (funders, borrower and Government).
Upon default, the funders may lose control to an administrator and have to allocate more capital to the project. In contrast, a soft mini perm sets out the contractual remedies available to funders and no additional capital is required. Unsurprisingly, the soft mini-perm is the structure more favored by the market generally.
Long-term funding is still available in the banking market.
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