Confused with all the gobbledegook? Let us help you
The commercial mortgage sector can be very confusing. Hopefully, our jargon buster/glossary will help you understand the more obscure terms and phrases.
We honestly believe that lenders do it deliberately to confuse people but at the end of the day, a commercial mortgage is only slightly different to a residential mortgage, read on for full explanations.
BMV (below market value)
BMV means that the buyer is purchasing the property for a price lower than the property is currently valued at. Using the example of a property valued at £500k by a surveyor, the buyer may be buying the property for £400k.
Why you may ask?
Well it could be that the seller (vendor) is in financial difficulty and their mortgage company may be getting ready to repossess their property.
If the seller owes their lender or mortgage company £400k, they may just want a quick sale under its market value to ensure the property is sold quickly to someone with the means to buy it quickly.
This ensures they can pay the mortgage lender back and not have a repossession on their credit file which would affect their ability to ever get a mortgage again in the future.
Much the same as a commercial mortgage, a business mortgage is used to allow owner/occupiers, basically firms who rent their premises, to buy the building they are working in.
It also applies to anyone looking to by a property to trade from or to rent out commercially.
Very simply, a bridging loan is used to purchase property or land quickly. It was originally designed for borrowers who wished to buy a property at auction and for those borrowers stuck in a chain…A bridging loan would allow the homeowner to purchase another property whilst still trying to sell their own home, effectively ‘bridging the gap’.
This is a type of finance where the lender will provide finance for a project in stages rather than all in one go. It provides the lender with greater security because they will only lend money when work has been completed.
Non Status Lending
A non-status lender means that the lender does not really care about your credit status. This is because non status mortgage lenders base their lending decision solely against the asset. Traditionally, bridging loans were designed for this purpose.
This is the name of each staged payment and relates to Development finance. For example, a borrower may be building a house so the lender will provide finance in arrears in staged drawdowns.
This means for example that the borrower buys the land (using bridging finance) and starts work by putting drainage in and clearing the site.
The lender will seek evidence of this through a QS and when they have it confirmed, the lender will allow the borrower to ‘drawdown’ the amount they have spent doing this.
This carries on until the development is built.
Ground Up Development
Unlike refurbishment which is ‘doing up’ an existing building, ground up development is where there is a bare piece of land upon which the borrower is going to build houses or other property right out of the ground.
This is more risky and in most cases, mortgage lenders will want to see evidence that the borrowers have experience of this.
HMO (house in multiple occupation)
Unlike a typical apartment block, a HMO is a building converted into a number of rooms (hence multiple occupation) with shared facilities. Typically, 4-6 bedrooms in an old house with a shared kitchen and bathroom.
The occupiers will pay one fee each month inclusive of bills and usually, they will be much cheaper than renting a traditional apartment. Of course, the downside is the shared facilities but a lot of modern HMO’s are now incorporating ensuites and small kitchen areas in each room which allows them to charge more.
OMV (open market value)
This is a valuation of the property if it were to be sold as it is now. This is different than a 90 day, 180 day or VP value. This is the usual valuation that a surveyor will use when valuing a property or land.
For example, if a surveyor valued an office block that was going to be converted into residential apartments, they would value the property for what they think it is worth right now in its current condition.
Also known as a PG. This is often used in commercial lending as is a way for the lender to recover their losses if a borrower fails to repay them. Because a lot of bridging loans and development finance are bought through SPVs or Limited Companies, it means that the lender would have no recourse to recover their money in case of default.
A PG however means that all of that individual borrower’s assets are at risk, including their main residential home so that if a lender has to ‘call a loan in’, then they would be able to go after that director/shareholders assets and take possession of them to get their money back.
Whilst the borrower won’t like giving a Personal Guarantee, lenders almost always insist on them.
PD (permitted development)
Usually, planning permission can take many months to go through but with permitted development, the approval takes only days, sometimes it is within 24 hours. Every county council will have areas that have been granted permitted development rights and usually (but not always) these are city centre commercial buildings that can be converted into residential units.
Most councils don’t want to see empty office blocks because 1. It doesn’t look good for them and 2. They will generate extra, much needed council tax if they can be turned into hundreds of apartments.
SPV (special purpose vehicle)
This is a limited company which has been set up with one specific purpose; To buy a property.
There will be no other businesses or other trading done from this, it will simply be the property or land that you are buying on this one particular transaction.
It helps to keep things simple and it also means that you will still have limited liability when and if there is a problem.
This is usually used to describe a house or other property that a main high street type lender would not lend against. Perhaps it has no kitchen, bathroom or even a roof. In other words, it is not in a good enough condition to get a normal residential mortgage on.
VP (vacant possession)
Using the example of a pub, the buyer may wish to purchase the pub, knock it down and turn the pub and car park into houses.
The (surveyor) valuer would value the property in three different ways:
1. OMV (open market valuation) The value of the pub now with all of its food and drink income being accounted for – a going concern if you like.
2. 90 day valuation. The value of the pub if it had to be sold quickly – sometimes known as a fire sale. There is usually a difference of 20% between the value of an asset now and the value of it if it was to be sold quickly.
3. VP. his is where the asset is valued as if there was no trading business there. No food and drink income just purely the value of the property and its land. Effectively, the bricks and mortar and land as if it was a bare shell.