| Detail | Explanation |
|---|---|
| Typical use | Bridge from construction completion to permanent financing |
| Structure | Construction phase, then a short amortizing or interest-only term |
| Conversion tests | Completion, occupancy or DSCR, and no defaults |
| Usual lenders | Banks and other balance-sheet lenders |
| Exit | Permanent loan refinance or sale |
How does a mini-perm loan work?
In a combined construction and mini-perm loan, the lender funds the budget through draws during construction, usually interest-only. When the building is complete and the conversion conditions are met, the loan rolls into the mini-perm period without a new closing. That period commonly lasts a few years and may require principal payments on an amortization schedule.
Mini-perms also appear as standalone short-term loans on newly completed properties. Either way, the loan ends with a balloon payment, which the owner repays with a takeout loan or sale proceeds.
What tests does a lender apply at conversion?
If the property misses a test, the lender may require a principal paydown, extend the construction phase for a fee, or decline conversion. That risk is why sponsors model the conversion test during underwriting, and why lease-up assumptions get heavy scrutiny.
- Completion of construction with a certificate of occupancy and lien releases
- A minimum occupancy level or a minimum debt service coverage ratio on actual income
- No default under the loan and no material adverse change in the sponsor
- In some loans, a paydown if income supports less than the full balance
Worked example
In this hypothetical example, a $25,000,000 construction loan converts to a mini-perm with payments based on a 7.00% rate and 30-year amortization. The lender's assumed conversion test is a 1.25x debt service coverage ratio. The table shows the income the building must produce to convert the full balance. Rate and test are illustrative only.
NOI needed = annual debt service x required DSCR
| Item | Value |
|---|---|
| Loan balance at conversion | $25,000,000 |
| Monthly payment at 7.00% on 30-year amortization | $166,326 |
| Annual debt service | $1,995,907 |
| Required coverage | 1.25x |
| Net operating income needed to convert | $2,494,884 |
Mini-perm or separate construction and permanent loans?
A mini-perm reduces refinance risk at completion because the sponsor does not need a new lender the day the building opens. It also keeps the relationship with 1 lender through lease-up. The trade-offs are that the rate and terms are set years before conversion, and the mini-perm term is short, so a second refinance is still coming.
Separate loans can deliver higher construction proceeds or a better long-term rate, but they leave the sponsor exposed to market conditions at completion. Capital Partners arranges construction loans and permanent loans and compares both paths. Test the conversion math with the DSCR calculator, and submit the project when the budget and pro forma are ready.
Common questions
What is the difference between a mini-perm and a permanent loan?
A mini-perm has a short term and is meant to be refinanced once the property stabilizes. A permanent loan has a longer term, is sized on stabilized income, and is usually priced for long-term hold.
What happens if my project does not qualify to convert to the mini-perm?
The lender's options are set in the loan agreement. Common outcomes are a required principal paydown to meet the coverage test, an extension of the construction term with a fee, or the loan maturing so the sponsor must refinance elsewhere.
Is a mini-perm loan recourse?
Many bank construction and mini-perm loans carry a full or partial personal guarantee, and some lenders reduce the guarantee after the property reaches stabilization tests. Terms vary by lender and sponsor strength.
Who offers mini-perm loans?
Banks are the most common source because they hold construction loans on their balance sheets and can keep the loan through the mini-perm period. Some private lenders offer similar structures on transitional properties.
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