Definition
A Permanent Loan is long-term financing used for a stabilized real estate asset. It typically replaces short-term financing such as a construction or bridge loan.
These loans are structured based on the property's in-place income and performance.
When It Is Used
- After construction completion
- After lease-up and stabilization
- To refinance higher-cost short-term debt
- To return capital to investors
Key Characteristics
- Term: Typically 5–30 years
- Amortization: Often 25–30 years
- Lower Interest Rates than construction loans
- Underwritten to NOI and DSCR
Debt Service Coverage Ratio (DSCR)
Permanent loans are often sized based on DSCR:
DSCR = Net Operating Income ÷ Annual Debt Service
Lenders commonly require DSCR of 1.20x–1.30x or higher.
Example
A developer completes a 200-unit apartment project. After achieving stable occupancy, the property generates $3 million in annual NOI.
The developer refinances a construction loan with a 10-year permanent loan at a lower fixed interest rate.
Why It Matters to Investors
- Reduces interest rate volatility
- Stabilizes long-term cash flow
- May allow equity recapitalization
- Improves refinance flexibility
Common Pitfalls
- Prepayment penalties
- Lockout periods
- Overestimating stabilized NOI
- Interest rate timing risk
Permanent Loan vs. Construction Loan
- Construction Loan: Short-term, higher risk, funds development.
- Permanent Loan: Long-term, income-based, funds stabilized asset.