Let’s face it, commercial property finance is made all the more difficult by the terms that are used. This guide will help you understand what is what and explain what each of these phrases and terms mean.
The purchase of land or property, usually used in the context of a development finance loan such as ‘day 1 acquisition’.
The Annual Percentage Rate is a calculation used to illustrate the relative costs of a deal. Usually used in consumer finance, it is a combination of fees and interest and is designed to give an overall picture of the total costs of borrowing money.
A fee applied by the lender or product provider for arranging the paperwork on a finance or loan deal. This can be paid upfront or added on to the loan amount.
The item that is being financed, be it a house, car, machinery or other tangible object.
Usually relating to property being sold at auction. Auction finance is simply another name for a short term loan or bridging loan and is used to buy a property quickly and within the terms of the auction house buying procedures. Most auction houses insist that finance is arranged to buy the property within 14 days.
A short term loan used to ‘bridge the gap’ in a property purchase. An example is that a property may need to be bought and financed before the owners existing property has been sold. This is where a bridging loan will come into play.
If the finance is being arranged by a broker, IFA or mortgage consultant, they will charge a fee for using their services.
Buy to Let
Most professional landlords have Buy to Let properties. Simply properties (residential property) that they buy and let out to renters. They don’t do this for short term capital gain, rather, they are in for the long haul and are looking for long term capital appreciation.
Collateral warranties are agreements between parties on a development project, who may not be in a contractual arrangement. For example, on a standard development, a QS will (usually) not have a contractual relationship with the lender, the borrower or any future tenant of the building so any collateral warranty signed in favour of these parties will mean that all those parties can bring a claim in contract against the QS, similar to the original client.
They are responsible for the legal aspects of a property based transaction. usually they work within a solicitors practice but they can work on their own. For a commercial transaction such as development finance, most lenders will insist on a solicitor being used.
Exactly how it sounds. It is the raising of a large amount of money from a lot (crowd) of people via the internet. The monies can be used for anything, such as starting a new business or financing a housing development.
Many lenders want out of a particular market and will offer their borrowers a much reduced figure for them to get out of the deal and refinance elsewhere. As an example, a lender may have a charge (loan) on a commercial property of £2m and now decide that they don’t want to be exposed (involved) in that particular sector. So, they may offer the clients a deal where they only have to pay them £1m instead of £2m but only on that proviso that the new refinancing deal is completed quickly.
This is where a borrower wants to either build, refurbish or extend a piece of land or a property. It won’t be in ‘one hit’ and there will be a need for ongoing finance, perhaps for 6-12 months, to finish the project. Development Finance will be provided by a lender who will stagger their payments to the borrower based on advice and guidance from a Quantity Surveyor (QS). Each drawing down of funds will be dependent on what work has been done and the QS will sign off where appropriate.
When the loan is redeemed (paid back) the lender will charge a fee based on a percentage of the outstanding loan amount. So if you still owe £100,000, the lender will charge you a percentage of that figure which you as the borrower will have to pay.
Ground up development
This is where a developer is building a brand new property on a piece of land.
Some lenders will allow a borrower to apply for a bridging or development loan even if they have bad credit. This is because their lending will be based on the asset and not the credit history of the borrower.
Very similar to Crowdfunding but Peer2Peer is a much larger market. The main difference is that in Crowdfunding, investors offer money usually in return for equity in the project they are looking to invest in. In Peer2Peer, investors offer their money to get a return, either by way of regular interest payments or by an appreciation in the capital value of the asset they are investing in.
Permitted Development Rights (PDR)
This is an initiative recently extended by the government. It allows developers to do certain types of development work without needing to apply for planning permission. A typical example of this is a disused office block being converted into residential apartments.
A property developer is a professional, (usually) full time individual who builds, refurbishes or extends properties to make a significant return on their investment, an investment which will usually be a combination of the developers own cash and a commercial mortgage from a lender. Anyone can be a property developer but the risks if a project goes wrong can be huge.
A more technical version of a valuer and they are used for extensive build projects where property is being built or where an extensive refurbishment program is taking place. They will also guide the lender as to when they are able to release funds on a development project.
The total figure owed to the lender including all fees and interest. In short term lending, redemption has to occur within 12 months.
Two scenarios. One is where a borrower has approached a lender for finance to ‘take out’ another lender. It could be that a particular lender has pulled out of the market and wants their money back from the borrower. So, another lender will come in and refinance the deal, taking out (paying back) the original lender. Scenario two is where a borrower has reached the end of the term for their bridging loan and will refinance to a longer term lender for say 5 or 10 years.
Report on title
This is undertaken by the Solicitor on behalf of the funder as it shows who is the registered owner of the property, other charges that may have been applied to the property (perhaps by other lenders) and any restrictive covenants. A restrictive covenant may be something like an inability to build on the land due to certain long standing restrictions.
Another way of seeing if there is financial merit in your property project. Rental Yield is your annual rental income return over the total costs of owning an investment property, expressed as a percentage of the property value. Mostly used for Buy to Let purposes and a good way for a landlord to check the viability of a deal.
Rolled up interest
Instead of paying the loan interest each month, borrowers have the choice of deferring their interest payment, or ‘rolling it uo’ as it is known in the industry. This means that they will not pay anything back each month and will add the overall interest to the loan and pay it back when they either sell their property or refinance it.
The property or land that is being used to secure (obtain) the loan.
Step in rights
Step in rights apply to the Collateral Warranty mentioned earlier. It allows the funder to replace one party (typically the building contractor) with one of their own if they feel that the original contractor has not met their obligations and possibly breached their contract. The build will then continue as normal.
This is a long term loan and is usually taken after the expiry of a bridging or development finance loan.
Title defects are not unusual but with title insurance in place, it need not delay the completion of a purchase or build. It is a form of insurance offered by sellers and demanded by buyers in order to protect the buyer (and their lender) from actual or perceived title defects. Still a relatively new concept in the UK, it is becoming more popular.
The person selling the land or property to the borrower.