Money & Finance › Commercial real estate lending › Commercial real estate loans: how income property is financed
Construction loans and mini-perms
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
Short floating-rate loans that fund a building as it is built, in monthly draws, repaid by a permanent loan or a sale.
See it on the Money & Finance map →How it works
The owner puts in equity first, often 35–50% of cost in 2023–25. The lender then funds monthly draws after an inspector confirms the work and the title company checks for mechanics' liens. Rates float over Prime or SOFR, interest is often paid from a built-in reserve, and terms run two to four years. Sponsors sign completion guarantees and often repayment guarantees. A mini-perm is a bank loan that converts after completion into a three- to five-year term loan, avoiding an immediate refinance.
Why it matters
It is the riskiest property lending: costs, delays and lease-up can all go wrong. That is why it caused heavy losses in past busts and carries heavier bank capital charges.
Facts, rules and data
Loan agreements and draw records, the HVCRE bank capital rules and 2006 concentration guidance, and FDIC histories of 1980s–90s bank and thrift failures.
Debates and risks
Whether tighter construction lending since 2023 will cause shortages of new space, and higher rents, later this decade is debated.
Connections (6)
▸Interagency CRE concentration guidance (2006): 100% and 300% tests sets a 100%-of-capital trigger for Construction loans and mini-permsFact, law or data
The connection
Construction and land loans carry the most risk: no rent yet, cost overruns and lease-up uncertainty. So the guidance set a lower trigger, 100% of capital, for them alone. Banks above it face extra scrutiny, which is why many cap their construction books and push developers toward more equity, mini-perms or debt funds.
When and why
Set in December 2006 at the end of a building boom; construction loans then drove many bank failures, notably in Georgia and Florida.
How we know
FDIC failed-bank reviews and a 2013 GAO report found heavy construction and land lending common among banks that failed in 2008–2011.
Debates and risks
Whether 100% is the right line: some banks run sound construction books well above it, while others fail below it.
▸HUD/FHA apartment loans: 221(d)(4) and 223(f) offer a 40-year alternative to Construction loans and mini-permsFact, law or data
The connection
A bank construction loan floats, needs a personal guarantee, runs two or three years and must be refinanced at completion. HUD 221(d)(4) covers construction and then 40 years in one fixed-rate, non-recourse loan locked at closing, removing refinance risk. The price: months of approval and federal prevailing wages, which raise building costs.
When and why
In US apartment development, especially by builders of affordable and workforce housing willing to wait for HUD approval.
How we know
HUD's MAP Guide and Section 221(d)(4) rules, the Davis–Bacon Act's wage requirements, and developers' term comparisons.
Debates and risks
How much prevailing-wage rules and slow processing offset the long fixed rate is disputed, and the answer varies by market and year.
▸Construction loans and mini-perms were a major source of losses in Savings and loan crisis (1980s–90s)Fact, law or data
The connection
1980s deregulation let savings and loans make acquisition, development and construction (ADC) loans, often funding all the cost, with interest reserves and fees booked as profit. When the 1986 tax law cut real estate shelters and the Texas oil bust hit, half-built projects lost value and those loans produced large losses.
When and why
Texas, the Southwest and California, about 1983–1992; the Garn–St Germain Act of 1982 and state laws widened what thrifts could do.
How we know
The FDIC's 'History of the Eighties', GAO reports, and mid-1980s accounting guidance requiring many ADC loans to be booked as real estate investments.
Debates and risks
Historians weigh deregulation, fraud, tax changes and regulators' delay differently; the crisis's first wave came from rate mismatch, not construction loans.
▸Construction loans and mini-perms can carry a 150% risk weight under Basel capital rules (Basel I, II, III)Fact, law or data
The connection
Under the US version of Basel III, most acquisition, development and construction loans count as 'high-volatility CRE' with a 150% risk weight, so banks hold 50% more capital than for an ordinary CRE loan. A loan escapes if the borrower contributes at least 15% of completed value and stays within loan-to-value limits.
When and why
US bank capital rule adopted July 2013, effective January 2015; Congress narrowed the HVCRE definition in May 2018.
How we know
The federal capital rules (12 CFR Part 324 for the FDIC, Part 217 for the Fed) and Section 214 of the 2018 Economic Growth Act.
Debates and risks
Bankers say the charge pushed construction lending to debt funds; regulators say it reflects real losses. The 'Basel III endgame' revisions remain unsettled.
▸C-PACE: green-upgrade loans repaid on the property-tax bill can replace part of Construction loans and mini-permsFact, law or data
The connection
For new buildings or big renovations, developers can fund the energy, water and resiliency parts of a project, often 10–25% of total cost, with C-PACE instead of costlier mezz or equity. The construction lender makes a smaller loan, and the C-PACE financing stays on as a long fixed-rate assessment after completion.
When and why
Growing since the late 2010s in hotel, apartment and office projects in states that allow C-PACE for new construction.
How we know
Lender deal announcements, state rules allowing new-construction C-PACE, and county assessment records.
Debates and risks
How construction lenders and C-PACE lenders share control if a project stalls is still being worked out deal by deal.
▸Standby letters of credit and bank guarantees often back completion and performance in Construction loans and mini-permsFact, law or data
The connection
Construction lenders and cities want backup if a project stalls. A developer may post a standby for part of its equity or interest reserve; a contractor may post one instead of a performance bond; cities often take one to guarantee streets and utilities. The beneficiary draws if the work or payment fails.
When and why
Common in US development, including California subdivision and public-improvement agreements; the cost is often about 1–3% a year of the face amount.
How we know
Construction loan agreements, municipal improvement-agreement forms that accept letters of credit or bonds, and bank fee schedules.
Debates and risks
Whether a letter of credit or a surety bond better protects owners and lenders, since a surety investigates before paying and a standby pays first.