Qualifying for a LOAN for commercial real estate investment isn’t easy. Even if you skip bank loans and try for private loan, you still need to find private lenders, and convince them to lend you significant amounts of money.
These tactics apply for investors considering commercial income properties that are ALREADY built.
However, an investor who plans on building a commercial property faces an even greater hurdle. Most banks and lenders want proof that a property will be profitable- an impossible feat if the real estate investment property isn’t built yet.
An impossible situation?
Believe it or not, there are several types of loans designed to help investors and developers finance unbuilt commercial properties. One of the most popular are known as a mini-perm loans.
What Are Mini-Perm Loans?
Mini-perm loans offer short-term financing that is usually payable in three to five years.
They are typically used to pay construction costs for commercial, industrial, and multi-unit residential properties. Mini-perm loans differ from construction-perm loans, which roll over automatically into a regular mortgage, and are much harder to qualify for.
Why Do Investors Want Mini-Perm Loans?
As stated earlier, in order to qualify for permanent financing, commercial properties need to show a history of profitability. Mini-perm loans are bridge loans that allows the investor to build the property, pay off construction loans, and accumulate a history of successful operations.Once this is proven, they can then qualify for permanent financing.
Mini-perms also allow investors more time to renovate an existing property, so that they can attract better tenants, who will help them establish a record of solid profits. After these profits are shown, the investor can choose to use a 1031 exchange to invest the profits in a more lucrative property, or they can choose to apply for long-term financing.
A plus is that once the income from an commercial real estate property is shown to be stable, lenders will often give better terms and rates on end loans.
What Types Of Properties Can They Be Used For?
Mini-perm loans can be used on nearly EVERY SORT of commercial property. While in the past commercial properties like retail shopping centers, multifamily apartment buildings, industrial parks, and office buildings, lately investors are finding success using the same loan to develop land, or improve a low-performing commercial property.
What Types Of Mini-Perm Loans Are There?
There are two types of mini-term loans, one much more common than the other.
Hard Mini-Perm Loans
The first type is known as a hard mini-perm, which is structured so that maturity is set at around 7 years. After that period of time, the borrower must either refinance, or default.
Payments for these types of loans are based on a 20 to 25 year amortization, and offer the advantage of allowing borrowers to refinance at market rates. Plus, since funders are able to price on a short-term basis, fees can be repaid over a shorter period of time, allowing investors to finish payment more quickly.
Hard mini-perm loans also have their disadvantages as well. One disadvantage lies in the risk of default, which due to the way the contract is set up, may be forced by an administrator to invest more funds in the construction project.
The second disadvantage is the risk that market conditions might be worse than when the loan was given, making refinancing difficult or prohibitively expensive.
In contrast, a soft mini-perm sets out the contractual remedies available to funders and no additional capital is required.
Soft Mini-Perm Loans
Soft mini perms have longer terms than hard mini-perms. However, these longer terms come with incentives to the borrower to pay off the loan early or refinance. This lowers the risk of default, making it an attractive loan for both lenders and borrowers.
In addition, lenders are often willing to be flexible with repayment terms: for example, interest only payments, or non-recourse loans.
Soft mini perm loans carry a balloon payment at the end of the loan term; the expectation from lenders is that since there is now a history of successful, profitable operation, it should be easy to refinance the loan with a permanent loan.