A.CRE

Permanent Financing

A long-term mortgage loan typically secured by a fully stabilized and performing real estate asset. A Permanent Loan (i.e. Permanent Financing) often includes a fixed interest rate with a longer loan term (7+ years). The permanent loan may or may not include an interest-only payment period for part or all of the loan term. These loans almost universally come with a penalty (i.e. yield maintenance, defeasance, % penalty, etc.) for prepaying the loan before maturity and many include a lock-out period early in the loan term during which the borrower is forbidden from prepaying the loan.

Putting ‘Permanent Financing’ in Context

Scenario Overview

SunCoast Equity Partners, a Miami-based real estate private equity firm, recently acquired a fully leased suburban office property known as Palmetto Business Plaza. The 150,000-square-foot property is located near a major transportation hub in Miami, Florida, and is anchored by several long-term corporate tenants. The property was acquired at a purchase price of $50 million, with a stabilized Net Operating Income (NOI) of $3.75 million annually, reflecting a 7.5% cap rate.

The Role of Permanent Financing

To secure long-term financing for this stabilized asset, SunCoast Equity Partners arranged a permanent loan of $35 million, representing a 70% loan-to-value (LTV) ratio. The loan features the following terms:

  • Loan term: 10 years
  • Interest rate: Fixed at 5.0%
  • Amortization: 30 years
  • Interest-only period: First two years of the loan
  • Prepayment penalty: Yield maintenance for the first five years, with declining percentages thereafter
  • Lock-out period: Two years

Contextualizing the Loan Terms

Given the property’s stable cash flow and creditworthy tenants, permanent financing was the ideal option to maximize cash-on-cash returns and reduce interest rate risk over the holding period. During the first two years, SunCoast Equity Partners benefits from interest-only payments, which keeps monthly debt service low, allowing for higher distributions to investors.

Key Financial Calculation

During the interest-only period, the annual debt service is calculated as:

  • Loan Amount: $35,000,000
  • Interest Rate: 5.0%
  • Annual Interest Payment: $35,000,000 × 5.0% = $1,750,000

With an NOI of $3.75 million, the property generates sufficient income to cover debt service with a debt service coverage ratio (DSCR) of:

  • DSCR = NOI / Debt Service
  • DSCR = $3,750,000 / $1,750,000 = 2.14

This strong DSCR highlights the conservative nature of the financing structure, appropriate for a core investment.

Conclusion

In this hypothetical scenario, permanent financing allows SunCoast Equity Partners to lock in predictable debt costs while enjoying the benefits of stabilized cash flow. The loan’s terms are tailored to suit the long-term hold strategy for Palmetto Business Plaza, illustrating how permanent loans are used to finance core, income-producing assets effectively.

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