A lending strategy that proved disastrous in the early 1990s is making a comeback.

As competition heats up in the nation's commercial real estate markets, banks and other lenders are once again offering "mini-perms"-loans that extend credit to developers for a few years beyond their projects' initial construction period.

Lenders agree to provide mini-perms at the same time they agree to make construction loans, in order to bridge the gap between construction and permanent financing.

First Union Corp., NationsBank Corp., Nomura Capital, and GMAC Commercial Mortgage are among the lenders that have instituted construction/mini-perm loan programs in the last 18 months. Though their programs echo those of the 1980s, lenders today can securitize their loans through the booming commercial mortgage-backed securities market.

In the 1980s, fee-hungry banks used mini-perms to extend the time before the borrower arranged permanent financing with an insurance company or other long-term lender. The strategy backfired a few years later when the loans expired simultaneously with traditional construction loans in the midst of a real estate bust.

Banks suddenly found themselves saddled with nearly $400 billion of bad debt-and the biggest crisis for the industry since the Great Depression.

But that was before the birth of the commercial mortgage-backed securities market, which saw some $40 billion in new issues last year. The market provides lenders with an efficient way to move real estate loans off their books.

Through the CMBS market, "banks control their own destiny," said Robert Woods, a former head of real estate capital markets at Citicorp. "That's the right way to do it."

But Mr. Woods, who is now head of loan syndications at Societe Generale, also sounded a note of caution. "My only concern as we move forward is the underwriting quality."

Another lender added, "The question is, when do some players start over- reaching? All of a sudden, we're back."

Demand for mini-perms is brisk. For developers, this form of "one-stop shopping" provides a guarantee of a permanent loan and the opportunity to avoid multiple loan closings and the fees associated with them. Often, they can also lock in pricing on their loans.

For lenders, mini-perm programs provide an opportunity to boost fee income. Just as importantly, they ensure product for their commercial mortgage conduits-the mechanism through which they securitize real estate loans.

Competition for conduit product "has grown much faster than anyone expected," said Bruce Kiley, a managing director in Price Waterhouse's real estate group.,

What lenders risk is that developers will not complete construction, that they will not be able to get occupants for their buildings, and general poor performance of the property.

But Jeffrey Moerdler, a partner with Lowenthal, Landau, Fischer & Bring, P.C., said that banks are more selective about who they make these loans to than they were a decade ago.

"Banks' criteria for determining loan amounts are more stringent. They are requiring more equity and greater credit worthiness for these loans," Mr. Moerdler said. "But clearly, they are looser than things were three years ago. We are not back to the ways of the 1980s, but we are certainly closing the gap."

Each lender has added a different twist to its mini-perm program. But most agree that there is avid demand for these facilities. At least one borrower is said to have specifically requested a mini-perm from potential lenders.

At Nomura Capital, San Francisco, which started its program a year ago, director Stewart Simon said demand has been strong.

"For us, it's satisfying the needs of our borrowers, creating more products for them, and allowing more flexibility in terms of the overall array of products that we provide," Mr. Simon said. "It's going quite well and we're seeing a lot of deal activity."

GMAC Commercial Mortgage Corp., Philadelphia, has had a construction/ mini-perm program for its hospitality and health-care businesses since late 1996, said Vacys Garbonkus, senior vice president and head of construction lending at the GMAC unit.

Michael Greco, managing director of real estate capital markets at First Union, Charlotte, N.C., said that the return of these loans demonstrates how "the capital markets have provided leadership and direction for product development."

Mr. Greco said that there has been tremendous demand for the program, which got under way about six months ago. The bank has about $500 million worth of deals in the pipeline.

Charlotte, N.C.-based NationsBank set up a program with Capital Lease Funding LP, a New York-based commercial mortgage lender, 15 months ago. The bank provides a construction loan for single-tenant properties with investment-grade credit ratings. Construction completion is the only condition for a tenant to take occupancy.

Capital Lease Funding then takes the lease, essentially turns it into a bond, and turns it back to NationsBank for its conduit. Since the lease fully amortizes the debt, the bank is taking only corporate credit risk, not real estate risk.

Michael Buchanan, executive vice president of real estate banking at NationsBank, said this system has worked smoothly for the bank.

"Every time we can reduce the number of things at risk, we are doing so," Mr. Buchanan said. "Having capital markets products available has enabled us to cut down on the number of factors at risk. It's better for us as lenders, and better for our clients."

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