Glossary of Terms Part One
Most business sectors and industries have their own terminology, which can at times be confusing to someone not used to the specific terminology.
And of course, the finance sector is no different. It has its own words and phrases which are often not fully understood, particularly by those raising finance for the first time.
As a result, in the next two week’s blogs, we are providing a Glossary of Terms to help with understanding. It is not meant to be an exhaustive list and nor is it intended to be used as a substitute for professional legal advice. Nevertheless, we hope you will find it useful.
Accrue
To accumulate. For example, interest that has accrued is interest that has fallen due, but which is unpaid and is therefore accruing. Common in development finance where interest is accrued or “rolled up” until the end of the development project when it is repaid along with the capital sum from the sale of the development.
Amortisation
The repayment of a loan by regular payments over an agreed period of time. A repayment or capital and interest loan.
Anchor tenant
A term used in commercial property investment to describe the strongest tenant or covenant within an investment. For example, in a large shopping centre development or investment, the anchor tenant would be a supermarket or large high street store.
Arm’s length transaction
A transaction conducted between unconnected parties
Assured shorthold tenancy – AST
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.
Balloon payment
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. (See also bullet repayment)
Base Rate
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.
Basis point
One-hundredth of one per cent, ie 25 basis points is 0.25%. When quoting an interest rate can be expressed as so many basis points over base rate, so for instance, 115 basis points over base rate would be 1.15% over base rate.
Bridging loan
Short term finance is made available pending longer-term funding being put in place or a sale of a property being completed.
Brownfield site
Land or a site that has previously been developed or used usually for commercial or industrial purposes but is now being developed for residential purposes. For example, much of the residential development currently being undertaken in old quays or dock areas is brownfield land.
Bullet repayment
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.
Cap rate
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 rate)
Caution
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
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.
CML
Council of Mortgage Lenders. The trade association for mortgage lenders in the UK. See www.cml.org.uk
Collar rate
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 mean that the cost of the rate cap will normally be reduced.
Collateral
Often used to describe the security available for a loan.
Collateral warranties
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)
Commitment letter
Usually, a non-binding letter setting out the terms of a loan that a lender might make available to a potential borrower.
Conditions precedent
A prerequisite. Usually, a list of conditions that must be satisfied prior to a lender releasing funds to a borrower.
Debenture
Strictly speaking, 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.
Demand facility
A loan repayable on the demand of the lender. Particularly common in the case of an overdraft.
Due diligence
Investigations undertaken prior to a particular transaction.
Easement
A right attached to a piece of land exercisable over a second piece of land. A common example is a right of way.
Equity
Used in a property or business finance context to mean the net value of the property or business after deducting the sums secured by all mortgages and loans on the particular asset.
Estimated rental value – ERV
The estimated achievable rent if a rent review or new letting of a property were to take place immediately.
Exit fee
A sum payable by the borrower when redeeming a loan
Facility letter
The document setting out a lender’s offer to a borrower together with the terms. This term is often interchangeable with the phrase loan agreement.
Floating rate
Interest at a rate which varies during the term of the loan typically by reference to changes in base rate or LIBOR. (see definitions)
FRI Lease
A full repairing and insuring lease which 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.
Gearing
The relationship between the value of an asset and the level of debt usually expressed as a percentage.
Greenfield site
Land or a site which has not been previously developed or used other than for agricultural or open space.
Gross Development Finance (GDV)
The term used to describe the value of a development project after it has been completed.
Ground rent
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.
Headlease
A lease from the freeholder of a property.
Heads of Terms
Usually a non-binding description of an agreement reached in principle often by a lender, from which binding legal documentation is produced.
Hedge
A technique to minimise risk exposure to movements in interest rates.
Interest only
Often refers to a loan from a lender on which no capital is payable.
Interest rate swap
An agreement to swap or exchange a floating rate of interest for a fixed rate or vice versa.
JCT
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.
Joint and several
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. Where the liability is ‘several’ each member of the group is liable in full. Most lenders insist on both joint and several liability.
Joint Venture – JV
A formal arrangement under which two or more parties undertake a project together, often using a company specially incorporated for the purpose.
Join us next week, when we will cover Glossary of Terms K to Z
Image by By Vasilevskiy Sergey from Canva
