Definition
Permanent financing — also called a "takeout loan" or "perm loan" — is the long-term mortgage that a commercial property owner secures once the property is stabilized and generating consistent income. Unlike bridge loans or construction loans, which are short-term and designed for transitional properties, permanent financing is designed for the long haul. Permanent loans typically have terms of 5-30 years, interest rates of 5-8% (significantly lower than bridge loans), and amortization schedules of 25-30 years. They may include an initial interest-only period of 1-5 years before payments begin to amortize. Major sources of permanent financing include banks, life insurance companies, CMBS (commercial mortgage-backed securities) lenders, and agency lenders (Fannie Mae and Freddie Mac for multifamily). Each lender type has different strengths: banks offer relationship flexibility, life companies provide the lowest rates for prime assets, CMBS offers non-recourse and higher leverage, and agencies provide the most favorable multifamily terms. Qualifying for permanent financing requires a stabilized property with proven income — typically occupancy above 85-90% and a DSCR above 1.20-1.35x.
How It Works
After executing a value-add business plan and stabilizing a property, the sponsor applies for permanent financing. The lender orders an appraisal, reviews trailing income statements, evaluates the borrower's financial strength, and sizes the loan based on LTV and DSCR constraints. The permanent loan pays off (takes out) the bridge or construction loan, and the borrower begins making long-term monthly payments. The lower interest rate and longer term significantly reduce the monthly payment compared to bridge financing.
Example
A sponsor stabilized a 100-unit multifamily property (95% occupied, $1,200,000 NOI) and needs to refinance a $9,000,000 bridge loan at 10%. The sponsor secures a $10,500,000 Fannie Mae permanent loan at 5.75% with a 10-year term and 30-year amortization. Monthly payment: approximately $61,300 (vs. $75,000 for the bridge loan). The additional $1,500,000 in proceeds returns capital to equity investors. Annual debt service: $735,600. DSCR: 1.63x.
Why It Matters
Permanent financing is the end goal for most commercial real estate business plans. It provides long-term stability, lower costs, and predictable payments that allow property owners to hold assets for extended periods and build equity through amortization. Understanding the requirements and timeline for permanent financing is essential because it directly affects the exit strategy for bridge loans and construction financing.
H Equities
While H Equities specializes in bridge lending and direct equity, many borrowers use H Equities bridge loans as a stepping stone to permanent financing — and H Equities helps sponsors plan their exit strategy from day one. Learn more
Frequently Asked Questions
When can I qualify for permanent financing?
Most permanent lenders require 3-6 months of stabilized income at 85-90%+ occupancy. The property must meet minimum DSCR requirements (typically 1.20-1.35x) and the borrower must demonstrate financial strength and property management capability.
What is a takeout loan?
A takeout loan is another name for permanent financing that "takes out" (repays) a short-term bridge or construction loan. The transition from bridge to permanent financing is a critical step in most CRE business plans.
What interest rates can I expect on permanent financing?
Permanent loan rates typically range from 5% to 8%, depending on the lender type, property type, borrower strength, and market conditions. Agency lenders (Fannie Mae/Freddie Mac) generally offer the most competitive rates for multifamily properties.
Related Terms
Bridge Loan in Commercial Real Estate
A short-term loan (typically 6-36 months) used to "bridge" the gap between acquiring or repositioning a property and securing permanent financing.
Senior Debt in Commercial Real Estate
The first mortgage or primary loan on a property, holding the highest priority claim on cash flow and sale proceeds in the capital stack.
Interest-Only Loan
A loan where the borrower pays only interest during the loan term (no principal reduction), resulting in lower monthly payments but a full principal balance due at maturity.
Common CRE Bridge Loan Terms
The duration and structural features of a bridge loan, including term length, extension options, interest rate structure, prepayment provisions, and reserve requirements.
Debt Service Coverage Ratio (DSCR)
A metric that measures a property's net operating income relative to its total debt obligations, indicating the property's ability to service its debt.