Mini-Perm: Definition, Uses, Vs. Construction Loan

What Is Mini-Perm?

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

Key Takeaways

  • Mini-perm financing may be used by a developer to pay off construction projects or commercial properties before they become profitable.
  • This type of financing typically covers periods of three to five years or even less.
  • Mini-perm financing is also used for investment property acquisition.

How Mini-Perm Works

"Perm" alludes to traditional permanent financing, which, in the case of the mini-perm, the borrower has not yet been able to secure. Mini-perm financing is something a developer would use until a project has been completed and can start producing income.

In this way, a developer will use mini-perm financing prior to being able to access long-term or permanent financing solutions. Mini-perm financing might also be used as a vehicle for investment property acquisition.

Implementing Mini-Perm Financing

New commercial properties that are effectively untested for revenue generation 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 to establish consumer traffic flow at the location. There is a risk that a new property might not attract enough overall business from tenants or customers to generate the expected revenue.

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 decrease in traffic to the site or business activity could mean the developer or owner might not have the steady revenue needed to repay their financing.

Industrial and office complexes are under comparable pressure if they do not bring in enough tenants to fully occupy the property.

New Opportunities with Mini-Perm Financing

Mini-perm financing is increasingly being put to alternative uses such as developing land, buying income property that is underperforming and leasing up, or assuming distressed debt and non-performing notes and applying a cash injection to take advantage of bargains.

Special Considerations

A potential risk associated with mini-perm financing is that the cost of development and construction could exceed the budget set for the completion of the project. This cost 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-term 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.