A.CRE

Permanent Loan

See Permanent Financing.

Frequently Asked Questions about Permanent Loans in Commercial Real Estate

A Permanent Loan is “a long-term mortgage loan typically secured by a fully stabilized and performing real estate asset.” These loans often include fixed interest rates, loan terms of 7 years or more, and sometimes an interest-only period. They are intended for long-term financing of income-producing properties.

Common features include:

Long loan terms (7+ years)

Fixed interest rates

Interest-only periods (part or full term)

Prepayment penalties such as yield maintenance or defeasance

Lock-out periods during which prepayment is not allowed

Borrowers choose permanent financing to “lock in predictable debt costs” and to “maximize cash-on-cash returns and reduce interest rate risk over the holding period,” particularly for stabilized, income-producing assets.

During interest-only periods, debt service is lower, which “allows for higher distributions to investors.” For example, SunCoast Equity Partners paid $1.75 million annually on a $35 million loan at 5%, while generating $3.75 million in NOI.

In the scenario, the permanent loan had a 70% LTV. This is common for stabilized assets, where lenders feel comfortable extending long-term financing.

DSCR is calculated as:
DSCR = NOI / Debt Service
For example, with a $3.75 million NOI and $1.75 million in annual interest payments:
DSCR = $3,750,000 / $1,750,000 = 2.14

Risks include:

Inability to prepay during the lock-out period

Prepayment penalties (e.g., yield maintenance)

Long-term commitment to debt even if property performance declines

A property is eligible when it is “fully stabilized and performing.” This usually means it is fully leased, generating consistent income, and has reached a mature operational phase.

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