Permanent Loan
The long-term loan that replaces construction financing once a building is done.
Quick Answer
A permanent loan is long-term financing secured by a completed property, often called the takeout loan because it pays off the construction loan. Repayment is typically based on the property's income and is amortized over many years. Lenders usually require that the building be finished and, for income properties, leased to a stabilized level.
The Full Picture
A permanent loan is the second half of the typical development financing story. Construction lenders accept risk that a building will not be completed or leased, so they price and structure the loan for a short term. Permanent lenders, such as banks, life insurance companies, agencies, and debt funds, lend against a finished and operating asset and accept a longer horizon.
Mechanically, underwriting centers on the property's net operating income and its ability to cover debt service. Lenders commonly look at debt service coverage ratio, loan-to-value, and sometimes debt yield, along with the borrower's strength. Terms may run many years, with amortization schedules that can be longer than the loan term, leaving a balloon payment at maturity. Rates may be fixed or floating, and specific numbers change with the market.
The takeout often has conditions that connect back to construction: a certificate of occupancy, final lien releases, completion of punch list items, and for rental properties a minimum occupancy or income threshold. If those conditions are not met on time, the construction loan may need an extension, which adds cost.
For contractors, the practical effect is schedule pressure. A completion date that slips can put the borrower's takeout at risk, so delivery dates in the contract and the project's close-out documentation often matter to the permanent lender as much as to the owner.
Real Examples
Common Misconceptions
People assume: A permanent loan lasts forever.
Actually: "Permanent" means long-term relative to construction financing. Many commercial permanent loans mature in several years and require a refinance or payoff at maturity.
People assume: A project automatically qualifies for permanent financing once it is built.
Actually: The takeout depends on completion conditions and, for income properties, on achieving enough income to meet the lender's coverage and loan-to-value tests.
Frequently Asked Questions
What is the difference between a construction loan and a permanent loan?
A construction loan is short-term, interest-only, and funded in draws while the project is built. A permanent loan is long-term financing on the completed property and repays the construction loan.
What does takeout mean?
The takeout is the long-term financing that pays off the construction loan. The term can also refer to the lender or commitment that provides it.
What is a debt service coverage ratio?
It is the property's net operating income divided by its annual debt payments. Lenders set minimum levels, which vary by property type and market.
Can you get both loans at once?
Yes. A construction-to-permanent loan combines them under one closing and converts after completion, though conversion conditions still apply.