What Is Permanent Financing in CRE?

The four major sources of permanent financing underwrite the same property differently. Life insurance companies tend to be the most conservative on leverage, often capping proceeds around 55 to 65% LTV, but offer the lowest rates for prime, stabilized assets and portfolio-hold the loan rather than selling it, which lets them negotiate more flexible terms directly with the borrower. CMBS lenders offer higher leverage, sometimes 70 to 75% LTV, and generally look past property-specific relationship factors that matter to a bank, but the loan is pooled and sold, meaning modification flexibility after closing runs through a special servicer rather than a relationship banker.

Agency lenders, Fannie Mae and Freddie Mac, specialize in multifamily and offer the most favorable combination of leverage and rate for that asset class specifically, often 70 to 80% LTV with non-recourse execution, but will not finance office, retail, or most other property types. Banks sit in between on leverage and rate, but offer the most negotiating flexibility on structure and often want an existing depository relationship, which can mean cross-collateralization or deposit requirements that do not appear in the other three channels.

Permanent loans almost always restrict early prepayment, but the mechanism varies by lender type. Yield maintenance requires the borrower to pay a penalty calculated to make the lender whole for the interest it would have earned had the loan run to maturity, discounted against a benchmark rate, common on life company and bank loans. Defeasance, common on CMBS loans, requires the borrower to purchase a portfolio of government securities that replicates the loan's remaining payment stream, substituting the securities for the real property as collateral rather than actually prepaying cash to the lender.

A step-down prepayment schedule, more common on agency and some bank loans, sets a declining percentage penalty by year, for example 5% in year one falling to 1% by year five, and is generally simpler to calculate and often less expensive than yield maintenance in a falling rate environment. Sponsors planning a sale or refinance within the loan term should model prepayment cost under the actual structure in their loan documents well before the exit, not assume one mechanism behaves like another.

Permanent loan rates are typically not fixed at application, they float until the borrower locks the rate, often 30 to 60 days before closing, by which point underwriting, appraisal, and third-party reports are far enough along that the closing date is reasonably certain. Locking too early, before diligence is complete, exposes the borrower to a breakage fee if the deal does not close on schedule or at all. Locking too late leaves the borrower exposed to rate movement between application and lock, which on a large permanent loan can change the sizing calculation meaningfully if DSCR-constrained.

Some lenders offer a forward rate lock, allowing a sponsor still completing a bridge loan business plan to secure a permanent rate months before the anticipated refinance, at a cost, typically a fee or a rate premium, that compensates the lender for holding the commitment. This tool directly addresses the refinance-timing risk a sponsor otherwise carries when the bridge loan and the permanent market do not naturally align.

The most common breakdown is a property that does not reach the occupancy or DSCR threshold the permanent lender requires by the time the bridge loan matures, forcing a bridge extension, a partial paydown from new equity, or a rescue refinance on less favorable terms. Rate movement between initial planning and actual refinance is the second common issue: a sponsor underwriting a bridge-to-perm exit at 6% who faces an 8% market at refinance time can see the permanent loan amount a DSCR test supports shrink by a meaningful percentage, sometimes requiring additional equity just to retire the bridge loan in full.

As an illustration, a sponsor locks a $9,000,000 permanent loan rate at 6% forty-five days before an expected closing, paying a refundable deposit of 1% of the loan amount, $90,000, held by the lender pending closing. A title issue delays closing by three weeks past the lock expiration. The lender agrees to extend the lock but charges a breakage and extension fee of 0.375% of the loan amount, $33,750, to cover its cost of carrying the rate commitment past the original date.

Had the sponsor instead let the lock expire and re-locked at a rate that had risen to 6.4% in the interim, the additional 0.4% on $9,000,000 would cost roughly $36,000 per year in additional interest, more than the extension fee, in this illustration, showing why sponsors often pay a lock extension fee rather than let a lock lapse during a minor closing delay.

Sponsors comparing permanent loan quotes across lender types should look past the headline rate to the terms that determine actual flexibility and cost over the hold.