Knowledge Base

Permanent Commercial Loans

A permanent loan is defined as a first mortgage on a piece of commercial property that has some amortization and a term of at least five years.  Most commercial permanent loans are amortized over 25 years.  If the property is older than 30-years-old and/or showing signs of wear and tear, many banks will insist on amortizing their commercial permanent loans over just 20 years.

Permanent loans usually enjoy the lowest interest rates among the various type of commercial real estate loans.  In large part this is because permanent loans are usually garden variety loans, with no special risks in the deal.  The property has already been constructed and almost completely leased out.

Permanent loans are usually made by either life insurance companies, conduits, banks, or credit unions.   In terms of the number of commercial loans written, banks are by far the most active makers of permanent loans.  I listed the types of permanent lenders in the order of their typical rates.  In other words, life insurance companies offer the lowest interest rates on permanent loans, followed next by conduits, banks, and credit unions.   Therefore, if you have the most gorgeous commercial property in town, you may want to start your search for a new permanent loan by applying to some life insurance companies.

Life insurance companies - known in the industry as just life companies - typically have a minimum loan size of $5 million. The same is true with conduits, although some conduits will make permanent loans as small as $3 million.  Banks are far more flexible about commercial loans sizes.  They will make commercial permanent loans from $100,000 to $100 million, although you should choose your bank according to the size of your loan request.  In other words, you should take small commercial loans to small banks and large commercial loans to large banks.  Credit unions usually have a maximum commercial loan size of $1 million to $2 million.

A takeout loan is a type of permanent loan, but it is a special type of permanent loan.  A takeout loan always pays off a construction loan.

There are other types of commercial first mortgages that are not permanent loans:

  1. A bridge loan is defined as a first mortgage loan on a commercial property with a term of just six months to two years.  Bridge loans give the owner some time to effect some change to his property, such as renovating the property or finding a tenant.  Once the troubling issue with the commercial property is fixed, the owner will usually either sell the property or come back and secure a permanent loan to pay off the bridge loan.   Bridge loans are typically more expensive than permanent loans.
  2. A mini-perm or interim loan is defined as a first mortgage on a commercial property with a term of two to three years.  A mini-perm can either be an interest-only loan or amortized over 25 years.  Most mini-perms are made by banks, and they are used to give the property owner time to solve some problem, most often leasing out the property.  Many mini-perms are written by banks, in connection with their own construction loans, to serve as standby takeout loans, just in case the developer cannot qualify for a normal takeout loan, perhaps because the building is not yet sufficiently leased.  These are known as construction-mini-perm combo’s.  The banks typically charge an extra point for the mini-perm commitment letter and another one point if the mini-perm actually funds.
  3. A construction loan is defined as a first mortgage loan on a commercial property that is used to build the property.  The loan proceeds are controlled by the construction lender to ensure that the building is actually built.  Most commercial construction loans are made by banks.  The typical loan term is one year, but often a six-month extension for one additional point can be negotiated.
  4. A forward takeout commitment is a letter from a bankable lender promising to deliver a takeout loan in the future.  Most, but not all, forward takeout commitments are issued by life insurance companies on large construction projects.  The letters usually cost between one and two points, plus many lenders often charge an additional fee of 1/2 point to one point if the loan actually funds.
  5. A standby takeout commitment is defined as a letter from a bankable lender promising to deliver an undesirable takeout loan in the future.  No one ever expects a standby loan to fund.  The reason why is because the actual loan terms of most standby takeout loans are pretty ghastly - a very high interest rate and an additional one to two points if the loan actually funds.  The purpose of a standby takeout commitment is merely to satisfy some construction lender that he has a guaranteed way to get paid off.  Standby takeout commitments cost two to three points, just for the letter.  The standby takeout commitment business is really out of favor right now because too many standby lenders over the years have used legal loopholes to weasel out of their commitments to pay off the construction lenders. 
  6. An Open-Ended Construction Loan or an Uncovered Construction Loan is defined as one with no forward takeout commitment in place.  This has become quite common today as banks develop confidence in the constant availability of commercial takeout loans.
  7. A Close-Ended Construction Loan or a Covered Construction Loan is defined as one with a forward takeout commitment firmly in place.  For the past 20 years commercial mortgage money has been abundantly available.  As a result, most construction lenders are quite comfortable making Uncovered Construction Loans.  Those commercial construction lenders demanding a forward takeout commitment are finding that they are not closing many deals.

Do you need a permanent loan on a commercial property?  If so, you can apply to hundreds and hundreds of different commercial permanent lenders by just hitting the Apply Now tab above.  Just be sure to choose “First Mortgage” as your Loan Type.  You can also apply for a Construction Loan or a Bridge Loan using C-Loans.

 

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