Permanent Loan Definition

A permanent loan has two distinct meanings, depending on the context.

In the art world, a permanent loan refers to an agreement in which an individual, trust, or company lends artwork to a museum or other cultural institution for an extended, indefinite period of time.

In the real estate world, a permanent loan refers to the first mortgage for a recently constructed commercial property with amortization on a term of at least five years, and usually much longer—25 years is typical.

In both cases the word "permanent" is a bit of a misnomer: The loan does not extend in perpetuity, even though it does exist for a long time.

A permanent loan is often negotiated between a cultural institution and a party who wishes it to have artwork but who prefers, for whatever reason, not to make an outright gift or donation.

The loan agreement may stipulate that the museum must display the lent artwork in a specific area, that the artwork is to be displayed as part of an exhibition, or that the artwork is not to be shown in a touring exhibition or loaned out to another institution.

Providing artwork to a museum under a permanent loan carries a certain level of prestige, especially if the artwork is well-known. The museum may prominently display the name of the benefactor in its literature and on display captions, along with the words "on permanent loan."

Accepting artwork under a permanent loan does pose a risk to the museum, however. Despite the word “permanent,” objects loaned under this sort of agreement can still be withdrawn at any time. For example, the heirs of a wealthy collector may request a painting be returned after the benefactor's death.

Additionally, museums that rely on permanent loans may fail to acquire their own pieces. If loaned artwork is recalled the museum will, of course, lose objects available for display—and the viewers who came to see them.

In real estate, permanent loans, also known as permanent mortgages, are taken out shortly after a new or renovated commercial building has been completed. Institutions that offer such permanent loans include credit unions, banks, and life insurance companies. While they can be as short as five years, in many cases, commercial permanent loans amortize over a 15-to-25 year period; 25 years is an especially popular term.

Often, permanent loans are taken out to repay the short-term (non-permanent) construction loan used to build the property; this particular variety of permanent commercial loan is known as a take-out loan.

Permanent loans are a popular refinancing vehicle because they carry very low interest rates—in fact, some of the lowest, compared with other types of loans for commercial real estate. The lower rate is available because the lender assumes there will be no special risks surrounding the transaction: Typically the property in question is fully constructed and is near full occupancy.