Mini Perm Loans for Real Estate: The Essential Guide

  • April 26, 2022

You’ve just purchased some commercial real estate, you’re marketing the space to prospective tenants, but there’s little to no money flowing in and you need to start paying back your loans. What can you do? This should be a profitable business venture, but it won’t go anywhere if you default on the loans used to purchase and develop this property.

This is where mini perm loans can be incredibly handy. They’re the stopgap measure you need to keep the creditors at bay until this property becomes the profitable business you know it can be. Keep reading to understand how a mini perm loan is a critical link in commercial real estate and how you can use one to turn a property into a successful enterprise.

What is a Mini Perm Loan?

In short, a mini perm is a loan used to pay for a commercial property that will generate income in the future but isn’t immediately profitable. Such would be the case for most commercial real estate as the developer takes time to secure tenants who will lease space within the property. 

They differ from construction loans in that most have lower interest rates and more flexibility in how they can be used. The property is already built, so there’s no risk of cost-overruns as there would be with a construction loan.

A mini perm could also be useful for a property that isn’t leasing space to tenants but rather selling a product to customers. For instance, a commercial solar farm can generate revenue as soon as it’s constructed, however, solar developers need to find customers for the electricity they’re producing. A mini perm loan would allow the developer to make interest-only or very low-interest payments during the solar farm’s construction phase and start paying off the principal as soon as they secure contracts.

Mini perms are frequently set up as interest-only loans. The borrower has no intention of making payments on the principal, as they can secure more favorable financing to pay off the loan once they’ve established their creditworthiness and found tenants to occupy the property. This isn’t always the case, as some mini perm loans are amortized over 20 or more years, but this is less common given that they have higher interest rates than traditional financing.

How To Use Mini Perm Financing

Now that you understand what a mini perm loan is, let’s explore some of the more popular uses for them.

Purchasing Commercial Real Estate

This one’s fairly obvious, mini perm loans are an excellent financing option if you are purchasing a property and need some time to get it occupied with tenants. In just a few years, with a good payment history and plenty of revenue coming in, you can refinance this mini perm loan with a lower-interest traditional bank loan.

Developing Land

Commercial real estate purchases may be the bread and butter of mini perm loans, they can also be used to develop land for business adventures that don’t involve rent-paying tenants. The aforementioned solar farm is a great example; the mini perm gives the borrower time to acquire a customer base. Once there’s some revenue coming in, the loan can be refinanced at a lower rate.

Leasing Up

Sometimes a property has all the hallmarks of a profitable space but is consistently underperforming. A change of management might be all that’s needed and a mini perm loan can be used to take over the property and secure new and potentially more profitable leaseholders. 

Types of Mini Perm Loans

All mini perm loans are considered a form of temporary financing, but they can differ in the details of how they’re repaid. Obvious differences can be found between soft and hard mini perm loans.

Soft Mini Perm Loans

These loans have the longest repayment periods, sometimes upward of 20 years. They’re designed to provide developers plenty of time to secure tenants for the property without the risk of default. However, there’s usually an incentive to pay the loan off early with interest rates jumping after just a few years. There’s a low risk of default, but you’ll want to pay it off quickly to avoid paying too much interest.

Hard Mini Perm Loans

Hard mini perm loans are the other side of the coin, offering relatively low-interest rates during the repayment period, but with a hefty balloon payment (the remainder of the principal) at the end. Many borrowers make interest-only payments for the first few years of the loan, which leaves them on the hook for the whole principal when the balloon payment comes due. 

If your property is unable to generate income during the repayment period, there’s a high risk of default. However, a positive payment history on a hard mini perm loan makes the borrower far more attractive to lenders who can refinance the remainder of the principal on better terms.

Why Use Mini Perm Funding?

Mini perm loans occupy a very specific niche; they’re useful for a short time between when a property is purchased and when it starts generating revenue. If you have creditors that need to be paid now, mini perm funding can be a lifeline. They’re not for everyone though, these are some of the advantages and disadvantages of mini perm financing.

The Good

  • Provides the working capital you need before a property is profitable.
  • More flexible creditworthiness requirements. 
  • No prepayment penalty with soft mini perm loans.

The Bad

  • Higher interest rates compared to traditional bank loans or SBA-backed funding.
  • Hefty balloon payment at the end of hard mini perm loans.
  • Short repayment period (or a spike in interest rates after a few years).

Mini Perm Financing and AVANA Capital

Securing funding for your commercial real estate venture has never been easier than with AVANA Capital. The team at AVANA Capital can tailor your financing to the specifics of your business, giving you the time and flexibility to pay off your loan as your business grows. 

Our loan products are designed to be flexible and reliable with fast approvals and closings. Our team has the experience and passion needed to serve business owners seeking financing. Request a loan today or connect with an expert to discuss your financing needs and we’ll help you find the best solution from AVANA Capital.