A mini-perm loan is a type of short term conventional loan typically used for acquisition of a commercial or multi-family property and establishment of an operating history, in preparation for obtaining a long term loan.
This type of loan is normally available during the project rental and early stabilization period, lasts a term of three to five years and is collateralized by commercial, industrial, or multi-unit residential properties. This financing method is utilized for a variety of property types including retail, office buildings, industrial properties, and apartment buildings, and land development.
There are two types of mini-perms: 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.
For example, the loan may carry a 10 year term, but include a provision for interest rate resetting at year 5. Mini-perm loans often include a floating-rate interest-only payment period in the early term of the loan (e.g. years 1 and 2, during a period of transition at the property such as leasing or renovation) and then it converts to a fixed-rate, amortizing payment later in the loan (e.g. years 3 to 5, once the property is stabilized). This structure assures that the borrower has time to secure permanent finance without the immediate threat of maturity default.
The loan carries a balloon payment at the end of the term with the anticipation that the loan can then be easily refinanced with permanent fixed-rate debt. This is due to the fact that the property now has an operating history on which to successfully obtain permanent financing. Mini-perm loans are used based on the assumption that a business or project will be profitable by the time the financing matures.