Glossary of Terms Part Two
This week we continue our Glossary of Terms commonly used in the Finance sector, 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.
Legal charge
The way by which a lender or mortgagee charges or secures an obligation or loan against satisfactory security, usually property.
Leverage
Often expressed as a ratio. It describes the relationship between debt and equity. A highly leveraged borrower is one that has incurred a large amount of debt in relation to the equity provided.
LIBOR
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 example3, 6 or 12 months. LIBOR is used as a reference rate of interest.
Long lease
There is no consistent statutory definition of a long lease. Usually, however a lease in excess of 21 years is considered to be a longer term lease.
LTV
Loan to value. The amount of a loan expressed as a percentage of the value of a property.
Margin
The difference between the rate at which a lender can borrow and the rate at which it will lend.
Mezzanine finance
The portion of a loan that exceeds the amount a lender would normally advance. So, if a development loan is 65% of the gross development value (GDV) of a project and a lender provides 75% of the (GDV), the extra 10% is what is known as mezzanine finance. 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. (see definition)
Moratorium
A delay. Often in relation to a business loan, 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.
Mortgagee
The one lending the money. Usually, a bank or lending institution.
NAV
Net asset value. An accounting term often relating to the value of a company or business.
NHBC
National House Building Council. Responsible for the Buildmark Scheme which provides insurance in respect of defects in the construction or refurbishment of residential property.
Nominee
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.
Nonrecourse loan
A loan where the lender relies only on the value of the property charged by the borrower to the lender. The lender cannot recover any shortfall from the borrower or a guarantor.
Non-status
The basis upon which some, often specialist lenders will consider a loan without the need to check accounts or confirm proof of income for the proposed borrower.
Outline terms
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.
Over-rented
Where the current or passing rent exceeds the estimated rental value. (See ERV)
Passing rent
The rent currently payable under the terms of a lease.
Personal Guarantee – PG
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.
Planning gain
Used colloquially to mean the increase in value of a property due to the grant of a planning consent.
Pre-Let
A binding agreement with an occupier before building works have been completed to enter into a lease on specific terms on completion of the building works.
Preliminary Enquiries
Enquiries about a property which a purchaser’s solicitor raises with the seller’s solicitor.
Premium
A payment made by a tenant to a landlord when taking over a lease. Can apply to both long and short leasehold.
Pre-payment
Early repayment of the whole or part of a loan.
Rack rent
A term commonly used to mean the full open market rent.
Ransom strip
A piece of land adjacent to a main site often forming part of an access way 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.
Recourse
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 can recover any resultant shortfall from the borrower or guarantor.
Report on title
A report based on an investigation carried out on behalf of a lender by its solicitor’s, confirming the extent to which the legal title to a freehold property is good and marketable and therefore good security for a loan.
Roll up of interest
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.
Sale & leaseback
A sale of property which is then immediately leased back to the seller by the buyer.
Senior debt
The part of a loan that is served by a first ranking charge. Often mezzanine finance (see above) is secured by a second charge.
SPV
Single (or special) purpose vehicle. A company set up for a particular project or to hold an asset or assets.
Stamp duty
A tax paid on documents transferring title to land or property based on the value transferred.
Step-in rights
The right for a financier of a development to step-in and take over the development in order to complete it. Normal where the developer becomes insolvent.
Tenure
The basis of a person or company’s ownership of land. Tenure is usually freehold or leasehold.
Term loan
A loan that is repayable over the 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.
Tranche
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.
Vacant Possession – VP
The right to possession of a property, ie. without the property being subject to leases or other rights of occupation.
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Our contact details at Funding Track are 020 3857 3030 and keith.park@fundingtrack.com
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