Owner/developers having a short-term holding period obtain
a construction loan to carry the project from inception through
completion. The owner combines the construction loan with a
commitment from the construction lender to carry the project
for a short period after opening, typically one to four years.
Note that the construction lender is taking both development
and operating risk in this case. This type of loan is called a
‘mini-perm’, taking the name from the fact that the operating
loan carries a short time commitment. Once the project has
reached stabilization, the owner goes back to the capital markets
to secure long-term permanent financing or the owner will
seek to sell the project or a portion thereof.
As can be seen, the process of securing development financing is
complicated. The reason for the ‘take-out’ plus construction loan
or the separate construction and permanent loans is that the risks
of development are very different from the risks of operating the
building. Lenders willing to take operating risk are generally
unwilling to take development risk and vice versa. Construction
loans are relatively expensive, because development risk is a significant
problem for developers. In general, interest rates on construction
loans are 1.0% to 3.0% higher than rates on permanent loans.