Business finance from DIYfunding

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The aim of this glossary is to aid understanding. It is not an exhaustive list of terms, nor is it intended as a substitute for professional legal advice.

A B C D E F G H I J L M N O P R S T V W Y

To accumulate. For example, interest that has accrued is interest that has fallen due but which is unpaid. Common in development finance where often interest is accrued or “rolled up” until the end of the development project.

The repayment of a loan by regular payments over an agreed period of time, normally called a repayment or capital and interest loan.

A term used in commercial property investment to describe the strongest tenant or covenant within an investment. For example, in a large shopping centre investment the anchor tenant would be a major supermarket or large high street store.

A transaction conducted between unconnected parties.

One form of residential tenancy created by the Housing Act 1988. It gives the landlord rights of possession and is the basis upon which all buy to let properties are rented out.

The largest repayment in a loan which is otherwise repaid by a series of smaller repayments over the term of the loan. This large repayment is usually made either near the beginning or at the end of the loan period.

The rate of interest used by individual clearing banks to set their own lending rate. The base rate is reviewed at monthly meetings and set by the Monetary Policy Committee (MPC) at the Bank of England.

One hundredth of one per cent is 1 basis point (0.01%). An interest rate can be expressed as so many basis points over base rate, for instance 115 basis points over base rate would be 1.15% over base rate.

A term relating to commercial investment property. A covenant refers to the strength of the tenant who occupies the property. A blue-chip covenant is the strongest type of tenant and would normally refer to a company which is a large, well-known, financially sound organisation, often a household name and - if a public company - then listed on the stock exchange as a 'Top 250' company.

Short-term finance made available pending longer-term funding being put in place or a sale of a property being completed. Bridging is normally referred to as either open-ended or closed. Closed bridging would apply where there is a clear exit strategy, such as exchange of contracts on a sale or a mortgage offer for long-term funding which would enable the bridging loan to be paid off. By comparison, open-ended bridging has no clearly defined strategy for repaying the bridging loan and it is therefore viewed as higher risk by the lender.

Land or a site that has previously been developed or used usually for commercial or industrial purposes but is now being re-developed for residential purposes. For example, much of the residential development currently being undertaken in old quays or dock areas is brownfield land.

Repayment of a loan by a single lump sum payment at the end of the loan term or the reduction of a loan often at agreed points in the loan term by lump sum payments.

A specialist report commissioned often to ascertain the viability of an existing business. Not only will the value of the business be determined but also a current trade assessment and a projection assessing future potential will also be provided. Lenders often accept these specialist reports where a vendor is unable to provide satisfactory accounting information.

An arrangement setting an upper limit on the interest rate payable by a borrower on a variable rate loan. A premium is normally payable for an interest rate cap. (See collar)

The procedure for registering a third party's interest in registered land or property at HM Land Registry, usually without the need for consent from the owner. When registering a caution, care needs to be taken and the advice of a solicitor should be sought.

Clearing bank ceased to have a technical definition in 1985, however the term is still commonly used to refer to the main UK high street banks.

Council of Mortgage Lenders. The trade association for mortgage lenders in the UK. See www.cml.org.uk

This is an arrangement where the interest on a variable rate loan is subject not only to a cap (see above) but also to a lower limit known as a floor or collar. With a rate collar in place this will normally mean that the cost of the rate cap will be reduced.

Often used to describe the security available for a loan.

Used in development projects. In a development a lender has little or no right of action against a building contractor or professional, ie architect or surveyor if there is for instance a defect in the building. The collateral warranty creates a separate contract between the lender and the contractor or professional that gives that right of action. A collateral warranty often gives the lender step-in rights (see definition)

Usually a non-binding letter setting out the terms of a loan that a lender might make available to a potential borrower.

A prerequisite. Usually a list of conditions that must be satisfied prior to a lender releasing funds to a borrower.

Any acknowledgement of indebtedness given by a company. In banking terms this is usually a secured debenture containing fixed and floating charges over the assets of a company.

A loan repayable on the demand of the lender. Particularly common in the case of an overdraft.

Investigations undertaken prior to a particular transaction.

A right that is attached to a piece of land, exercisable over a second piece of land. A common example is a right of way.

Used in a property or business finance context to mean the value of the property or business after deducting the sums secured by all mortgages and loans on the particular asset.

The estimated achievable rent if a rent review or new letting of a property were to take place immediately.

A sum payable by the borrower when redeeming a loan, this is a common term used in development funding.

The document setting out a lender's offer to a borrower together with the terms of the loan. The term 'facility letter' is often interchangeable with the term 'loan agreement'.

Interest at a rate which varies during the term of the loan typically by reference to changes in base rate or LIBOR. (see definitions)

A full repairing and insuring lease contains clauses obliging the tenant to keep the property in repair and to insure the property or pay the landlord to do so. Effectively an FRI lease transfers to a tenant all liabilities of the property for the duration of the lease.

The Financial Services Authority which is the chief financial services regulator in the UK. See www.fsa.gov.uk

The relationship between the value of an asset and the level of debt usually expressed as a percentage.

Land or a site which has not been previously developed or used other than for agricultural or open space.

Rent payable for land or property usually held under a lease for 99 years or longer. Ground rents are usually payable where the lease has been granted in return for a premium.

A lease from the freeholder of a property.

Usually a non-binding description of an agreement reached in principle often by a lender, from which binding legal documentation is produced.

A technique to minimise risk exposure to movements in interest rates (see also definitions of 'cap' and 'collar').

An agreement to swap or exchange a floating rate of interest for a fixed rate or vice versa.

Joint Contracts Tribunal. A familiar term within development finance. JCT produces a variety of standard forms of building contract in relation to the employment of building contractors.

Often in relation to two or more parties providing guarantees to lenders in respect of a loan. The liability of two or more is 'joint' if they are each only liable for their share of the loan. Where the liability is ‘several’ each member of the group is liable in full. Most lenders insist on both joint and several liability.

A formal arrangement under which two or more parties undertake a project together, often using a company specially incorporated for the purpose.

The way by which a lender or mortgagee charges or secures an obligation or loan against satisfactory security, usually property.

Often expressed as a ratio. It describes the relationship between debt and equity. A highly leveraged borrower is one that has a large amount of debt in relation to the equity provided.

The London Inter-Bank Offered Rate. This is the rate at which a bank may lend to or borrow from other banks in the London inter-bank market. The rate varies according to the size of the loan and its period, for example, 3, 6 or 12 months. LIBOR is used as a reference rate of interest.

There is no consistent statutory definition of a long lease. Usually, however, a lease in excess of 30 years or where ground rent is payable is considered to be a long lease.

Loan to value. Usually referred to as a ratio, but expressed as a percentage.

The difference between the rate at which a lender can borrow and the rate at which it will lend.

The portion of a loan that exceeds the amount a lender would normally advance. So if a loan is 90% of the value of a property and the lenders usual criteria allows for 80% loan to value lending, then the extra 10% is mezzanine debt. This may be provided by the same lender or a different lender or organisation. The interest rate margin is usually higher than for senior debt.

A delay. In relation to a loan (or mortgage) where a loan is being taken but, for instance, a refurbishment of the business is to take place prior to commencement of trading. In such a case a moratorium or delay in making interest payments of, say, 3-6 months can be agreed with the lender until such time as the business begins to trade.

The one lending the money. Usually a bank or lending institution.

Net asset value. An accounting term often relating to the value of a company or business.

National House Building Council. Responsible for the Buildmark Scheme which provides insurance in respect of defects in the construction or refurbishment of residential property.

A person who holds title to an asset on behalf of the true owner. Often used with off shore companies where nominee directors are appointed.

A loan where the lender relies only on the value of the security charged by the borrower to the lender. The lender cannot recover any shortfall from the borrower or a guarantor.

The basis upon which some lenders will consider a loan without the need to check accounts or confirm proof of income for the proposed borrower.

A right to acquire a property (call option) or to require somebody to purchase property (put option) at a given price. Usually options are limited in time.

Usually a non-binding statement of the basis on which a lender will make a loan to the borrower. Usually a precursor to the facility letter or loan agreement.

Where the current or passing rent exceeds the estimated rental value. (See ERV)

The rent currently payable under the terms of a lease.

Provided by the borrower to the lender, whereby the borrower personally guarantees part or all of the loan in the event of default. Common where a bank is lending to a limited company and the PG’s of the directors are required.

Used colloquially to mean the increase in value of a property due to the grant of a planning consent.

A binding agreement made with a prospective occupier before development works on a property have been completed.

Enquiries about a property which a purchaser's solicitor raises with a vendor’s solicitor.

A payment made by a tenant to a landlord, especially when a long lease is to be granted at a ground rent. However, a premium can apply to both long and short leaseholds.

Early repayment of the whole or part of a loan.

A term commonly used to mean the full open market rent.

A piece of land adjacent to a main site often forming part of an accessway or other essential part of the site. The owner of the ransom strip can often extract an inflated price for the strip because of its importance to the use of the main site.

Opposite of a non recourse loan (see above). In other words, in the event of a shortfall after the sale of a property the bank or lender has recourse and can recover any resultant shortfall from the borrower or guarantor.

A report based on an investigation carried out on behalf of a lender or purchaser of a property based on its own solicitor's due diligence exercise confirming the extent to which the legal title to a freehold property is good and marketable and therefore good security for a loan.

A term relating specifically to commercial investment property. It is the amount of debt outstanding at the point where the lease on a property expires. Normally the amount of residual debt to be outstanding at the expiry of the lease will have been agreed with the lender at the commencement of the loan and is usually calculated as a percentage of the vacant possession value of the property when the lease expires.

The accumulation of interest during the period of the loan, which is normally repaid at the end of the loan period along with the principal amount. Common when financing development projects.

A sale of property which is then immediately leased back to the seller by the buyer.

The part of a loan that is served by a first ranking charge. Often mezzanine debt (see above) is secured by a second charge.

Single (or special) purpose vehicle. A company set up for a particular project or to hold an asset or assets.

A tax paid on documents transferring title to land or property based on the value transferred. Current values are as follows:

Up to £250,000		1%
£250,000 - £500,000		3%
Above £500,000		4%

The right for the lender of a development project to step-in and take over the development in order to complete it. Normal where the developer becomes insolvent.

The basis of a person or company’s ownership of land. Tenure is usually freehold or leasehold.

A loan that is repayable over an agreed term. Contrast this with a demand facility (see above) where the lender may require repayment at any time. With a term loan, provided the borrower keeps to its terms, the lender is only entitled to repayment in accordance with the facility letter or offer documentation.

When a loan is drawn down in parts or stages. During a development project, funding for the development is normally drawn down in stages or tranches.

The right to possession of a property, ie. without the property being subject to leases or other rights of occupation.

The procedure under section 155 of the Companies Act 1985 whereby the prohibition on financial assistance is relaxed in relation to private companies. For instance, a whitewash would be used to enable the assets of a private company to be charged in order to assist with the acquisition of the shares of that company.

A description of capital value based on actual or potential income. If someone buys a property as an investment they pay a capital sum in return for the right to receive a rental income. For example, a property purchased for £1,000,000 which brings in £40,000 per annum in rent is bought at 25YP. That is the value of rents received over a 25 year period that will equal the original capital outlay of £1,000,000.

The income of a property expressed as a percentage of its cost. The yield is the inverse of a years purchase. So, using the above example, if the number of years purchase is 25 then the yield is 4%. The yield on a property depends on a variety of factors including location, standard of building, number of car parking spaces, the quality of other premises in the area and also the quality of the tenant. Knowing the yield on a property allows the investor to compare the investment potential of different types of properties.