DEFINITION of Mini-Perm

Mini-perm is short-term financing used to pay off income-producing construction or commercial properties. This type of financing is usually payable in three to five years.

BREAKING DOWN Mini-Perm

"Perm" alludes to traditional permanent financing, which the borrower in this case has not yet been able to secure. Mini-perm financing is something a developer would use until a project has been completed and can therefore start producing income. In other words, a developer will use this type of financing prior to being able to access long-term or permanent financing solutions. Mini-perm financing might also be used as a vehicle to acquire investment properties.

How Mini-Perm Financing Is Implemented

New commercial properties that are effectively untested for generating revenue may not be particularly attractive to lenders. These properties have yet to fill with tenants to produce rental revenue or bring in other commercial activity that the developer or owner expects will create revenue. Mini-perm financing may be used to cover this interim period until the property generates revenue and creates a track record of performance that lenders can measure.

A retail property that has been built may need time to both bring in tenants to occupy the space and also see consumer traffic flow steadily to the location. There is the risk that a new property might not attract enough overall business from tenants or customers to generate the revenue the property potentially could see. Consumer-driven properties such as shopping malls and restaurant sites are particularly reliant on regular patronage that develops shortly after the property opens for business. A fall off in traffic to the site or other drops in business activity could mean the developer or owner might not have the steady revenue to repay their financing.

Industrial and office complexes can be under comparable pressure if they do not bring in enough tenants who will occupy the property to near full occupancy.

Other potential risks include the cost of development and construction exceeding budgets set for the completion of the project. This could significantly reduce the developer’s ability to generate a profit from the property and pay back lenders.

Mini-perm financing differs from other types of short lending such as construction loans or construction-to-permanent loans. A construction loan is usually taken out to cover the costs of building on the property and could lead to long-term financing once construction is complete. Construction loans tend to have higher interest rates because they are considered risky.