Glossary of Terms

We have tried to simplify the jargon that most banks, bridging loan lenders and property development finance lenders use in an easy to understand format. 

Property lending is relatively simple in nature but it is in the banks’ interests to make it sound more complicated than it is. Hopefully, these definitions will help you navigate the maze.

If you require further help, please call us on 01244 565095 and we would be delighted to help.

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Affordable Housing

Affordable housing is a term used in the UK to describe housing that is affordable to people with low to moderate incomes. It is generally considered to be housing that is available at a below-market rent or purchase price, and is aimed at people who are unable to afford to buy or rent housing on the open market. There are different types of affordable housing, including social housing, shared ownership, and affordable rent schemes.

Social housing is usually owned and managed by local authorities or housing associations, and is provided at a subsidised rent to those who meet certain eligibility criteria. Shared ownership schemes enable people to part-buy and part-rent a property, with the aim of eventually owning the property outright. Affordable rent schemes are designed to provide rental housing at a lower than market rate.

Affordable housing is an important issue in the UK, particularly in areas where housing costs are high. Many people struggle to find affordable housing, particularly in London and the South East, where prices are particularly high.

There are a range of policies and initiatives designed to increase the supply of affordable housing in the UK, including government funding for affordable housing projects, changes to planning regulations to encourage the development of affordable homes, and incentives for housing associations and developers to build more affordable homes.

However, there are also concerns that the supply of affordable housing is not keeping up with demand, particularly in areas with high levels of deprivation, and that this is contributing to rising levels of homelessness and housing insecurity.

Asset-backed lending

A loan that is secured against the property being developed or renovated.

Auction Finance

Auction finance in the UK is a type of property finance that is used specifically to purchase properties that are being sold at auction. When a property is sold at auction, the buyer is typically required to provide payment in full within a short timeframe, often within 28 days of the auction.

Auction finance is designed to help buyers secure the necessary funds to purchase a property at auction. This type of finance is typically available from specialist lenders, such as bridging lenders, who are familiar with the auction process and can provide quick decisions and fast access to funds.

Auction finance can be used to finance the purchase of a range of properties, including residential, commercial, industrial, land and mixed-use properties. It can also be used to finance the purchase of properties that may be considered higher risk, such as those that require significant heavy refurbishment or renovation.

Auction finance is typically secured against the property being purchased and the amount of finance available will depend on the value of the property and the borrower’s creditworthiness. Interest rates and other terms and conditions for auction finance may vary depending on the lender and the specific property being purchased.

Overall, auction finance is an important option for buyers who are looking to purchase a property at auction but need additional financing to do so. With specialist lenders providing quick decisions and fast access to funds, auction finance can help buyers secure their desired property and make a successful bid at auction.

BRRR

BRRR stands for Buy, Refurbish, Rent, Refinance, which is a popular strategy for property development in the UK. This involves purchasing a property in need of renovation, refurbishing it, renting it out to generate income and then refinancing the property to release equity for further investment. This strategy can be profitable, but it requires careful planning, investment, and management skills to execute successfully.

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.

Business Mortgage

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.

Bridging Loan

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’. For a full explanation, please visit our Bridging Loan page.

Buy to Let

A Buy to Let mortgage is a type of loan specifically designed for individuals who want to purchase property as an investment, intending to rent it out to tenants rather than live in it themselves. These mortgages differ from standard residential mortgages in several key ways, reflecting the distinct nature and risks of property investment.

Eligibility and Criteria

Lenders typically have stricter eligibility criteria for Buy to Let mortgages. Borrowers usually need a higher credit score, a stable income, and a significant deposit, often around 25% or more of the property’s value. Additionally, lenders will assess the potential rental income from the property to ensure it can cover the mortgage payments, usually requiring the rental income to be at least 125-145% of the monthly mortgage repayments.

Interest Rates and Terms

Interest rates on Buy to Let mortgages are generally higher than those for residential mortgages, reflecting the increased risk to the lender. These mortgages can come with fixed, variable, or tracker interest rates, allowing investors to choose the option that best suits their financial strategy and risk tolerance. The loan terms can also vary, typically ranging from 5 to 35 years.

Repayment Options

Buy to Let mortgages often offer both interest-only and repayment options. With an interest-only mortgage, the borrower pays only the interest on the loan each month, with the principal amount repaid at the end of the mortgage term. This can make monthly payments more affordable, but it requires a clear strategy for repaying the principal, such as selling the property or using other savings or investments. Repayment mortgages, on the other hand, require both interest and principal to be repaid each month, gradually reducing the loan balance over time.

Tax Implications and Considerations

Investors should be aware of the tax implications associated with Buy to Let properties. Rental income is subject to income tax, and there may be capital gains tax to pay when the property is sold. Recent changes in tax regulations have also affected the deductibility of mortgage interest for higher-rate taxpayers, making it essential for investors to understand the financial impact of these changes and possibly seek advice from a tax professional.

Benefits and Risks

Buy to Let mortgages enable investors to leverage borrowed funds to purchase investment properties, potentially generating rental income and capital growth over time. However, there are risks involved, such as property value fluctuations, rental void periods, and the responsibilities of being a landlord. Proper research, financial planning, and risk management are crucial for success in the Buy to Let market.

CIL

In UK property development, the Community Infrastructure Levy (CIL) is a planning charge imposed by local authorities on new developments to help fund essential infrastructure projects and improvements within their jurisdiction.

Introduced by the Planning Act 2008 and further regulated by the CIL Regulations 2010, the CIL is designed to support the provision of public services, amenities, and facilities, such as schools, transport, green spaces, and healthcare facilities.

The levy is calculated based on the size, type, and location of the development, with charges typically expressed as a rate per square metre of the gross internal area of the new build.

The CIL operates alongside Section 106 agreements, but it offers a more transparent and predictable approach to financing local infrastructure improvements.

By contributing to the CIL, developers help ensure that their projects are sustainable and that the wider community benefits from the necessary infrastructure enhancements resulting from new property developments.

Closed Bridge

A closed bridge bridging loan is a short-term loan that is secured against a property or asset, which is used to bridge the gap between the sale of one property and the purchase of another. It is called a closed bridge loan because the loan has a fixed term and a clear exit strategy, which is typically the sale of the property or asset being used as security for the loan. This type of loan is often used by property developers and investors who need quick access to funds to complete a project or purchase a property.

Collateral Warranties

Collateral warranties are legally binding agreements that establish a direct contractual relationship between different parties involved in a construction project, such as developers, contractors, subcontractors, consultants, and end-users.

These warranties provide a means for parties not originally in direct contractual privity to seek recourse for damages or losses incurred due to negligence, breach of contract, or defects in workmanship or design.

Collateral warranties are intended to protect the interests of stakeholders by ensuring that the parties responsible for the project’s various aspects meet their obligations and adhere to the agreed-upon standards of quality and performance.

In essence, they serve as an additional layer of assurance, facilitating the smooth execution of a property development project and mitigating potential legal disputes.

Commercial Mortgage

A commercial mortgage in the UK is a loan specifically designed for businesses looking to purchase or refinance commercial property, such as office spaces, retail shops or warehouses. The loan is secured against the property and the interest rates and terms may vary based on the lender and the borrower’s financial situation. However, a commercial mortgage is usually cheaper than a bridging loan.

Completion date

The date by which the development project is expected to be finished and ready for sale or rent.

Construction loan

Same as a Development Loan. A short-term loan designed to finance the construction or renovation of a property, with the funds typically released in stages as the project progresses.

Covenant

A legally binding agreement or clause in a contract that requires one party to perform certain obligations or restricts them from specific actions related to a property.

Credit backed terms

This is where the borrower’s application has been formally approved by the lender’s credit committee. This is basically an ‘agreed loan’ and it is rare for the loan to fall down after approval at credit committee. Consider it a binding decision and one the lender cannot back track from.

Credit Score

A credit score is a numerical representation of a borrower’s creditworthiness, which is used by banks, bridging lenders and other specialist lenders to determine the likelihood of the borrower repaying their debts on time. The credit score is calculated based on the borrower’s credit history, payment behaviour, outstanding debts and other financial factors. A higher credit score indicates a lower risk of default, which makes it easier for borrowers to obtain loans and credit at favourable terms.

Decision in Principle (DiP)

In UK property lending, a Decision in Principle (DiP), also known as an Agreement in Principle (AiP) or Mortgage in Principle (MiP), is a preliminary agreement from a lender indicating that they are willing to lend a specified amount to a potential borrower based on an initial assessment. This document is not a final mortgage offer but serves as an indication of the borrower’s creditworthiness and the likelihood of obtaining a bridging loan, development finance, commercial or residential mortgage.

Key Features of a Decision in Principle

1. Preliminary Approval: The DiP shows that, based on the information provided, the lender is willing to lend a certain amount to the borrower. It is subject to further checks and a full application.
2. Validity Period: The DiP is typically valid for a limited period, often around 30 to 90 days. During this time, the borrower can use it to show sellers and estate agents that they are serious buyers with a potential bridging loan lined up.
3. Conditional Offer: The DiP is conditional and subject to a full application and underwriting process, including a detailed assessment of the individual, property valuation and how they will repay the loan.

Development exit bridge

A short-term loan used to bridge the gap between the completion of a development project and its eventual sale or refinancing. For example, you have taken a bridging loan from a lender to purchase land and then taken a development finance facility to build 4 houses on that land. However, you are coming to the end of your 18 month term with that lender and you still have 3 of the 4 houses to sell. They are completed but you just need time to attract buyers.

A development exit bridge will provide a loan of up to 12 months, fully rolled up, so that you can have breathing space to sell the remaining 3 properties. The new bridging lender knows that they are fully built and signed off (in terms of building regulations) so they are comfortable that you will be able to repay their loan well within the 12 month loan term.

Development exit finance/loan

Exactly the same as above, just different lenders call them different things.

Development Finance

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. See Drawdowns where this process is explained a little more.

Development monitoring

Development monitoring is a process that involves monitoring and evaluating a property development project at various stages to ensure it is progressing as planned, and that the project is being delivered on time, within budget, and to the required quality standards. Here’s how development monitoring might work on a development project in the UK:

1. Set up a monitoring framework: The first step is to establish a monitoring framework that outlines the key milestones, deliverables, and performance indicators for the project. This will provide a basis for tracking progress and identifying any issues that need to be addressed.

2. Regular site visits: The next step is to conduct regular site visits to ensure that the construction work is proceeding as planned, and that the project is meeting the required quality standards. Site visits may be conducted by the project manager, an external consultant, or a representative from the client.

3. Progress reports: Regular progress reports should be produced to document the progress of the project, identify any issues or risks, and outline any corrective actions that need to be taken. These reports should be circulated to all relevant stakeholders, including the client, contractors, and project team.

4. Quality control: Quality control checks should be carried out at various stages of the development process to ensure that the work is being carried out to the required quality standards. This might include testing materials, inspecting finished work, and ensuring that all relevant building codes and regulations are being followed.

5. Budget monitoring: Budget monitoring is an important part of development monitoring. This involves regularly reviewing project expenditure against the budget to ensure that the project is staying within the agreed financial limits. Any cost overruns or under-spending should be flagged and addressed as necessary.

6. Risk management: Risk management is an ongoing process throughout the project. Risks should be identified, evaluated, and mitigated to ensure that the project stays on track. This might involve conducting regular risk assessments, developing risk management plans, and implementing risk mitigation strategies.

By monitoring and evaluating a development project at various stages, developers can identify issues and take corrective action to ensure the project is delivered successfully. This helps to ensure that the project meets the client’s objectives and is delivered on time, within budget, and to the required quality standards.

Debt restructuring

The process of modifying the terms of an existing loan, often to reduce the amount of debt owed or extend the repayment period.

Distressed sale

In property terms, a distressed sale refers to the sale of a property that occurs under circumstances where the seller is under significant pressure to sell quickly, often due to financial hardship or other urgent reasons. These sales are typically characterised by the following features:

Characteristics of a Distressed Sale

1. Urgency: The seller needs to sell the property quickly. This urgency might be due to impending repossession, bankruptcy, or other financial difficulties.
2. Below Market Value: Properties in distressed sales are often sold at a price lower than their market value. The need for a quick sale can lead to a significant discount to attract buyers swiftly.
3. Financial Hardship: The seller is usually experiencing financial distress, which may be due to various reasons such as losing their job, long term illness, relationship breakdown or simply an inability to keep up with mortgage payments in times of high interest rates.
4. Repossession: The property might be on the brink of being repossessed, or the lender may already be involved in the sale process. In some cases, the lender may force the sale to recoup the outstanding loan amount.
5. Condition of the Property: The property may be in poor condition due to the owner’s inability to maintain it, further contributing to its reduced price.

Common Reasons for Distressed Sales

• Repossession: The lender is taking possession of the property due to the owner’s failure to make mortgage payments.
• Bankruptcy: The owner is liquidating assets to pay off creditors such as HMRC.
• Divorce or Separation: The need to divide assets quickly can lead to a distressed sale.
• Job Loss or Reduced Income: Financial instability can necessitate a rapid sale to raise capital to cover living expenses or pay off debt.

Implications for Buyers and Sellers

• For Sellers: A distressed sale can be a last resort to avoid the property being repossessed by the lender or bank or even further financial ruin. While it allows for quick access to cash, the seller usually receives less than the property’s market value.
• For Buyers: Distressed sales can offer opportunities to purchase properties at below-market prices. However, buyers should be aware of potential risks, such as property condition issues, existing debts or covenants or complicated negotiations with lenders or other creditors.

Examples of Distressed Sales

1. Discounted Sale: The lender agrees to accept less than the outstanding mortgage balance to facilitate a quicker sale and avoid the repossession process.
2. Lender-Owned Properties: Properties that have already gone been repossessed and are owned by the lender, typically sold at a discount.
3. Auction Sales: Properties sold at auction, often due to foreclosure or tax debts, usually at prices lower than market value.

Distressed sales play a significant role in the UK real estate market, providing both challenges and opportunities for those involved. Understanding the nuances and potential pitfalls is essential for buyers and sellers navigating this type of transaction.

Drawdown

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.

Easements

Easements are legal rights that grant one property owner (the dominant tenement) non-possessory access or usage of another property owner’s land (the servient tenement) for a specific purpose.

These rights often arise to address functional requirements of a property, such as access to shared resources, utilities, or passage.

Common examples of easements include rights of way, rights to light, and rights of support. Easements can be created in various ways, such as through express grants, implication, prescription, or necessity. They typically run with the land, meaning that these rights are attached to the properties in question and not to the owners themselves, and are therefore transferred upon the sale or transfer of the properties.

In property development, understanding and addressing easements is crucial, as they can impact the development potential, use, and value of a property, as well as the legal relationships between neighbouring landowners.

Equitable charge

An equitable charge in UK lending is a type of security interest granted over an asset, typically real property, which gives the lender certain rights without transferring ownership of the asset. It provides a way for lenders to secure loans by creating a charge over the borrower’s property or other assets as collateral.

Key Characteristics of an Equitable Charge:

1. Security Interest: An equitable charge is a form of security interest, meaning it grants the lender rights over the borrower’s property to secure the repayment of a loan or other obligations. If the borrower defaults, the lender can enforce the charge to recover the debt.

2. No Transfer of Title: Unlike a legal charge, where the ownership of the property might transfer to the lender if the borrower defaults, an equitable charge does not transfer legal title or ownership. The borrower retains ownership, but the lender has a claim on the property’s value.

3. Creation: An equitable charge can be created through a formal agreement between the borrower and the lender. It does not need to comply with the formalities required for a legal charge, such as registration with the Land Registry, but it can still be enforceable in equity.

4. Enforcement: If the borrower fails to meet their obligations, the lender can enforce the equitable charge by obtaining a court order to sell the property. The proceeds from the sale are then used to repay the outstanding debt.

5. Priority: Equitable charges generally rank behind legal charges in terms of priority. If there are multiple charges on a property, legal charges are usually satisfied first from the proceeds of any sale, followed by equitable charges.

6. Flexibility: An equitable charge can be more flexible than a legal charge, as it can be applied to a wider range of assets and does not require the same level of formalities. This can be beneficial for lenders and borrowers in certain situations where a legal charge is not practical or possible.

Uses in Lending:

In UK lending, equitable charges are commonly used in various situations, such as:

• Bridging Loans: Short-term loans that require quick access to funds may be secured with an equitable charge when time constraints make it difficult to arrange a legal charge.
• Second Charges: When a borrower already has a legal charge on their property, an equitable charge can be used as a second charge, providing additional security for further borrowing.
• Development Finance: Equitable charges can be used to secure finance for property development projects, where the value of the property is expected to increase significantly upon completion.

How do they differ from a 1st or 2nd charge?

An equitable charge differs from a 1st or 2nd legal charge primarily in terms of the legal status, priority, and enforcement mechanisms. Here’s a breakdown of the key differences:

Legal Status

• 1st Charge (Legal Charge): This is a primary security interest granted to a lender over a property. It provides the lender with the strongest form of security. The lender has legal title, which means they have the right to take possession of the property and sell it in the event of default. It must be registered with the Land Registry.
• 2nd Charge (Legal Charge): This is a secondary security interest that ranks behind the first charge. The holder of a second charge can only enforce their rights after the first charge has been satisfied. Like the first charge, it also needs to be registered with the Land Registry.
• Equitable Charge: This is a security interest that does not transfer legal title to the lender. It operates in equity rather than law, meaning it is enforceable by court order rather than by direct action. It does not need to comply with the formalities required for legal charges, such as registration with the Land Registry.

Priority

• 1st Charge: The first charge has the highest priority over other charges. If the property is sold, the proceeds go first to satisfy the debt secured by the first charge.
• 2nd Charge: The second charge ranks behind the first charge. It will only be paid from the sale proceeds after the first charge has been fully satisfied.
• Equitable Charge: An equitable charge usually ranks behind both first and second legal charges. It will be satisfied from the sale proceeds only after any legal charges have been paid.

Enforcement

• 1st Charge: The lender can take possession of the property and sell it directly if the borrower defaults, without needing a court order.
• 2nd Charge: The lender can take possession and sell the property, but only after the first charge has been settled. Enforcement is similar to that of the first charge but is secondary in priority.
• Equitable Charge: Enforcement requires obtaining a court order to sell the property. The lender cannot directly take possession or sell the property without going through the legal process.

Creation and Registration

• 1st Charge: Requires formal creation and must be registered with the Land Registry to be effective and enforceable.
• 2nd Charge: Also requires formal creation and registration with the Land Registry, ensuring it is noted and has priority over any subsequent charges.
• Equitable Charge: Does not require the same formalities for creation and registration. It can be created more informally through a written agreement between the lender and the borrower.

Practical Uses

• 1st Charge: Commonly used for primary mortgages or loans secured against the main property.
• 2nd Charge: Used for additional borrowing where the property already has a first charge, such as a second mortgage or home equity loan.
• Equitable Charge: Used in situations where formal legal charges are impractical, such as short-term loans, bridging finance, or when additional security is needed quickly.

Understanding these differences is crucial for both borrowers and lenders, as they impact the security, priority, and enforceability of loans.

Equity release

A financial product that allows property owners to access the equity tied up in their property without having to sell it, typically through a home reversion plan or lifetime mortgage.

Exit strategy

The plan for how a borrower will repay their loan, typically through the sale or refinancing of the property being developed.

Fixed JCT Contract

A fixed JCT (Joint Contracts Tribunal) contract is a type of standardised construction contract that establishes a fixed price for the completion of a specific project. The JCT, a leading authority in producing standard forms of construction contracts, offers a range of contract templates to cater to different project requirements.

Under a fixed JCT contract, the contractor agrees to complete the project within a specified timeframe and at a predetermined price. This arrangement provides a level of certainty for both the developer and the contractor, as it outlines the scope of work, cost, and completion schedule, minimizing the risk of budget overruns and project delays.

In turn, this fosters a sense of trust and confidence among parties, streamlining the construction process and promoting successful outcomes in property development projects.

Feasibility study

A feasibility study is a preliminary assessment of a property development project to determine if it is viable, achievable and sustainable. Here’s an example of a feasibility study for a UK property development project:

1. Market Analysis: This would involve assessing the demand and supply of the property market, local economic and demographic trends, and identifying potential competition in the area. In this section, you might consider factors such as:

• The current demand for similar properties in the area
• Recent trends in property sales and prices
• The level of competition from other developers in the area
• The local population demographics and their housing needs
• Local employment opportunities and the state of the local economy

2. Site Assessment: In this, you would evaluate the physical characteristics and limitations of the site. Some considerations might include:

• The size, shape, and topography of the site
• Access to utilities such as electricity, water, and gas
• Environmental factors such as soil quality and any potential hazards
• Existing zoning laws and planning restrictions on the site

3. Financial Analysis: This would involve estimating the costs associated with developing the property, the potential revenue streams, and the overall financial viability of the project. Factors to consider might include:

• The cost of acquiring the land and any necessary permits or approvals
• The cost of construction materials and labour
• Financing costs, including interest and fees
• Projected revenue from sales or rental income
• Potential returns on investment and profitability

4. Risk Assessment: This would involve identifying any potential risks and challenges associated with the project, including:

• Changes to local planning policies or regulations
• Environmental or ecological concerns
• The possibility of delays or cost overruns
• The potential for unforeseen market shifts or economic downturns

By assessing these factors, a feasibility study can help developers make informed decisions about whether to pursue a project, and how best to structure it for success.

Gross Development Value (GDV)

The estimated value of a development project once it is complete and ready for sale or rent.

It represents the total expected revenue a developer can generate from the sale or rental of all units in a development, assuming that the project is developed to its maximum potential and market conditions remain favourable.

GDV is an essential component of feasibility studies and financial appraisals for development projects, as it helps developers, investors, and lenders assess the potential profitability and viability of a project. It also aids in determining the appropriate amount of financing needed for the development.

To calculate GDV, the following factors are typically considered:

Local market conditions: Current and projected demand for the type of property being developed, as well as comparable properties in the area, are analysed to determine appropriate pricing.

Property size and specifications: The total square footage, number of units, and specific features of the development (e.g., amenities, finishes, layout) are taken into account.

Projected rental income or sales revenue: Based on the market analysis and property specifications, projected rental income or sales revenue for each unit in the development is estimated.

Total GDV: By summing up the projected rental income or sales revenue for all units in the development, the overall GDV is obtained.

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.

High Net Worth (HNW)

A High Net Worth (HNW) individual is someone who has a net worth of at least £1 million, excluding their primary residence. They typically have significant financial resources and may have access to exclusive investment opportunities and financial services. HNW individuals are often targeted by financial advisors, wealth management firms and other professionals who specialise in managing and growing their wealth.

Institutional Investors

An institutional investor in property lending refers to an organisation or entity that invests a large amount of money into real estate or property loans, typically with the goal of generating a return on investment. These investors can include pension funds, insurance companies, VC firms, hedge funds and other large financial institutions that have the resources and expertise to invest in complex real estate projects. Institutional investors in property lending often have strict investment criteria and risk management strategies to ensure the safety and profitability of their investments.

Interest-only loan

A loan where the borrower only pays interest on the loan amount, with the principal due at the end of the loan term.

Interim funding

Short-term financing used to cover a gap in funding during the development process.

Investment Property

An investment property is a real estate property that is acquired with the intention of earning a return on investment by renting it out, selling it for a profit, or both. Investment properties are typically purchased by investors who want to generate income or build wealth through property ownership.

Investment properties can include a range of real estate assets, such as residential properties, commercial properties, industrial units and land. These properties can be owned directly by an individual or through a company (usually an SPV) or a trust structure.

Investment properties are distinct from properties that are purchased for personal use, such as a main residence or a holiday home. The primary goal of an investment property is to generate income or appreciation, whereas a personal property is primarily for the owner’s enjoyment and use.

Joint venture (JV)

Joint ventures (JVs) are a common approach in UK property development where two or more parties come together to pool resources, share risks and share profits on a development project. Here’s an example of how a JV might work in a UK property development context:

Let’s say that a developer has identified a site in Liverpool for a new residential development but they do not have sufficient funding to undertake the project alone. The developer could approach an investor or equity partner to form a JV for the development project.

In this example, the developer and the investor agree to form a 50/50 JV, with each party contributing £5 million towards the development. The total development cost is estimated to be £10 million.

The developer will manage the project, while the investor will provide the funding. The parties agree to share any profits on the development equally, after the initial investment and any other agreed costs are recovered.

The developer then proceeds to secure planning permission and engage contractors to carry out the construction work. The development takes two years to complete, and the total costs incurred are £9 million. The units are sold for a total of £13 million, generating a gross profit of £4 million.

After deducting the initial investment of £10 million, there is a net profit of £2 million. As per the terms of the JV, the profit is split equally between the developer and the investor, resulting in a profit of £1 million each.

The JV structure allowed the developer to undertake a larger project than they could have otherwise, while the investor was able to earn a return on their investment without having to take on the full development risk. This is a typical example of how a JV might work in UK property development.

Land registry

The government organisation responsible for maintaining records of land ownership and property transactions.

Leasehold

A type of property ownership in which the occupant owns the property for a fixed period of time but does not own the land on which it is built. The land is owned by the freeholder, to whom the leaseholder pays ground rent.

Legal Pack

A legal pack is a collection of legal documents that are prepared by the seller’s solicitor in relation to a property being sold at auction or by private treaty. The legal pack will typically include important information about the property and its ownership, such as title deeds, property searches, planning permissions, leases (if applicable), and any other legal documents relevant to the sale.

For property finance, the legal pack is important because it provides the lender with important information about the property and its legal status. Lenders will typically review the legal pack as part of their due diligence process before deciding whether to provide financing for the property.

The legal pack can also be important for buyers, as it provides them with a comprehensive understanding of the legal status of the property they are purchasing. Buyers can review the legal pack to identify any potential legal issues that may affect the property’s value or their ability to finance the purchase.

The legal pack is an important component of the property finance process as it provides both lenders and buyers with important information about the legal status of the property being purchased.

Legal Undertaking

The Solicitor’s cost undertaking is an agreement (hence the term undertaking) provided by the applicant’s solicitor to cover the fees of the lender’s solicitor, even if the case does not proceed for any reason.

Loan-to-value (LTV)

The ratio of the amount of money being borrowed to the value of the property being used as collateral.

Mezzanine finance

A type of loan that sits between senior debt and equity finance, providing a higher-risk, higher-return investment opportunity.

Monitoring Surveyor

A Monitoring Surveyor plays a critical role in property development finance by providing independent oversight and risk management during the construction phase of a development project. They are typically appointed by the lender or investor to monitor the progress of the project and ensure that it remains on track financially and logistically.

The Monitoring Surveyor’s role begins before construction commences, as they review the project plans and cost estimates to ensure they are accurate and feasible. During construction, they monitor the progress and quality of the work, verify that payments to contractors are appropriate, and assess any potential changes to the project that may affect its financial viability. They also ensure that the project is complying with all applicable regulations and requirements.

In contrast to a QS, a Monitoring Surveyor’s role is focused on risk management rather than cost management. While a QS focuses on managing the costs of the project, a Monitoring Surveyor ensures that the project is progressing on schedule, that the work is of appropriate quality, and that there are no unexpected issues that could impact the project’s completion or financial viability. Overall, the roles of a QS and a Monitoring Surveyor complement each other and are essential for successful property development finance.

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.

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.

Open Bridge

Unlike a closed bridge loan, which has a fixed repayment date, an open bridge loan does not have a set repayment date, which gives borrowers more flexibility in terms of when they can repay the loan. 

Overage

Also known as “clawback” or “uplift,” is a provision in property development agreements in the UK that allows the seller of land to potentially receive additional payment(s) in the future. This provision is triggered if the value of the land increases beyond a certain threshold due to obtaining planning permission, successful development, or a change in land use that enhances its value.

Typically, an overage agreement is negotiated and agreed upon by both the buyer and the seller during the sale process. The overage clause outlines the specific conditions that must be met, the calculation method for the additional payment, and the duration for which the overage provision applies (usually a specified number of years).

For example, a landowner may sell a piece of land to a developer at a price based on its current value, with an overage agreement in place. If the developer successfully obtains planning permission and the land’s value increases significantly, the landowner would be entitled to an additional payment, calculated as a percentage of the increase in value, as per the terms of the overage agreement.

This arrangement can be beneficial to both parties, as it enables the buyer to purchase land at a lower initial cost, while also providing the seller with the potential to benefit from future increases in value.

Personal Guarantee

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.

Planning gain

Summary: The increase in the value of a property or land as a result of obtaining planning permission for development or change of use.

Planning gain, also known as Section 106 agreements, is a process in UK property development where local authorities negotiate with developers to provide community benefits and infrastructure improvements in exchange for planning permission for a development project.

For example, let’s say a developer wants to build a new housing development in a city centre location. The local authority might require the developer to provide affordable housing units within the development or contribute towards the provision of affordable housing elsewhere in the local area. This would be a community benefit that is negotiated as part of the planning gain process.

In addition to affordable housing, the local authority might also negotiate for the developer to provide other community benefits, such as new parks or open spaces, improved transport links, or contributions towards the provision of healthcare facilities, schools, or other community services.

These community benefits are often proportionate to the scale of the development and are designed to offset any negative impacts that the development might have on the local area, such as increased traffic or pressure on local services.

Once the planning gain agreement is reached, it becomes legally binding and the developer must deliver the agreed benefits as part of their development project. This helps to ensure that new developments are not just profitable for developers, but also contribute positively to the local community and environment.

Planning permission

The legal permission required from the local authority to undertake property development or changes to existing properties. For example, most lenders like ourselves will only fund land with planning permission so it is vital that you know before you purchase a piece of land, that it is highly probable that you will get approved for planning. Otherwise, you may well end up stuck with it.

Pre-construction funding

Financing options used to fund the early stages of a development project, such as the site acquisition or planning permission process.

Principal Lender

A principal lender, also referred to as a direct lender or primary lender, is a financial institution or individual that provides loans directly to borrowers. These lenders use their own funds to lend, rather than acting as intermediaries between borrowers and other financial sources.

Principal lenders can include banks, bridging lenders, development finance lenders, specialist finance lenders, family offices, building societies, credit unions, private lenders, or online lending platforms. They set their own interest rates, underwriting criteria, and loan terms, and typically generate revenue from interest payments and fees associated with the loans they provide.

Borrowers generally benefit from working with a principal lender because they can obtain loans more quickly and at potentially lower rates, as there are no brokers/middlemen involved in the lending process. Additionally, direct communication with the lender can lead to a more transparent and efficient borrowing experience.

Project appraisal

The process of evaluating the feasibility of a development project, including its potential costs, risks, and returns.

Property development

The process of creating new buildings or renovating existing ones for commercial or residential purposes.

Project feasibility

Project feasibility refers to the assessment of the likelihood of a property development project being successful. This assessment typically takes into account a wide range of factors, including the location of the development site, the local market conditions, the availability of financing, and the costs and risks associated with the project.

In evaluating the feasibility of a development project, developers and investors may consider factors such as the demand for new properties in the area, the availability of skilled labor and materials, the projected cost of construction, and the expected return on investment.

Other factors that may be considered in a project feasibility analysis include the potential impact of zoning laws and other regulations on the development, the availability of infrastructure such as roads and utilities, and the potential environmental impact of the project.

Ultimately, the goal of a project feasibility analysis is to determine whether a development project is likely to be profitable and sustainable in the long term. This assessment can help developers and investors make informed decisions about which projects to pursue and how best to allocate their resources to maximize returns.

Project management

The process of planning, coordinating, and executing a development project to achieve its objectives.

Quantity Surveyor

A QS, or Quantity Surveyor, plays a crucial role in property development finance by managing the costs associated with a development project. They are typically involved from the early stages of a project and provide cost management services throughout its lifecycle.

In the initial stages, a QS may provide budget estimates to help determine the feasibility of the project. During the design phase, they will review plans and specifications, identify potential cost savings, and provide detailed cost estimates. Once construction begins, they will continue to monitor costs and ensure the project stays within budget. They will review invoices and change orders, verify that work has been completed as specified, and track progress against the project schedule. The QS will also provide regular reports to the developer or lender, highlighting any significant changes in costs or risks that may impact the project’s financial viability. Overall, the QS ensures that the development project is completed on time and within budget while also identifying and mitigating potential risks.

Real Estate Investment Trust (REIT)

A company that owns, operates, or finances income-producing real estate, allowing investors to buy shares and receive dividend income from the properties.

Refurbishment

The process of renovating or improving an existing property, often with the intention of increasing its value or making it more suitable for a different use.

A refurbishment loan is a type of short-term financing used to fund the renovation or improvement of a property. In the UK, refurbishment loans are often used by property developers, investors, and homeowners to improve the value of a property or make it suitable for a specific purpose. Here are some examples of refurbishment loans in the UK:

1. Light Refurbishment Loan: This type of loan is designed for relatively minor renovation projects that do not require any significant structural changes or planning permissions. Examples include cosmetic improvements like painting, flooring updates, kitchen or bathroom upgrades, and installation of energy-efficient systems.

2. Heavy Refurbishment Loan: This type of loan is suitable for more extensive renovation projects that involve significant structural changes or alterations, such as adding an extension, converting a property into multiple units, or changing the property’s use (e.g., converting a commercial building into residential units). Heavy refurbishment loans typically require planning permissions, building regulations approval, and potentially other types of permits.

3. Bridging Loan for Refurbishment: A bridging loan is a short-term financing option used to “bridge” the gap between purchasing a property and securing longer-term financing or selling the property. In the context of refurbishment, a bridging loan can be used to fund the purchase and renovation of a property, with the intention of either refinancing it with a traditional mortgage or selling it at a higher price once the improvements are completed.

4. Buy-to-Let Refurbishment Loan: This type of loan is tailored for property investors looking to renovate a property to rent it out to tenants. Buy-to-let refurbishment loans can cover both light and heavy refurbishment projects, depending on the lender’s criteria and the scope of the renovation work.

Section 106

Section 106 (S106) refers to a clause within the Town and Country Planning Act 1990 that enables local authorities to negotiate agreements with developers to secure contributions, often in the form of financial or in-kind support, to mitigate the impact of their developments on the local community and infrastructure.

These legally binding agreements, known as Section 106 agreements or planning obligations, ensure that developers provide necessary amenities or infrastructure improvements, such as affordable housing, public open spaces, educational facilities, or transportation upgrades, in connection with the granting of planning permission.

The primary purpose of a Section 106 agreement is to make a development proposal acceptable in planning terms by addressing concerns related to the project’s impact on the community and ensuring that the development is sustainable and beneficial to the wider area.

Secured lending

A loan that is backed by collateral, typically the property being developed or renovated.

Site acquisition

The process of acquiring a property site or land for development purposes.

Site survey

An inspection of the property site to assess its condition, potential challenges, and any necessary preparation work.

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.

Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is a tax levied on property transactions in England and Northern Ireland, while similar taxes apply in Scotland (Land and Buildings Transaction Tax) and Wales (Land Transaction Tax). SDLT is imposed on the purchase of residential and commercial properties, as well as on land transactions over a certain value. The tax is paid by the buyer of the property or land.

The amount of SDLT payable is calculated as a percentage of the property’s purchase price, with different rates depending on the property’s value and the buyer’s status (first-time buyer, owner-occupier, or investor). The SDLT rates are structured in bands, meaning that different portions of the property price are taxed at different rates, creating a progressive system.

For residential properties, there is a tax-free threshold below which no SDLT is payable. Above this threshold, the tax rates increase incrementally with the property value. Higher rates of SDLT may apply to buyers who are purchasing additional properties, such as second homes or buy-to-let investments.

It is essential for buyers to factor SDLT into their budget when purchasing property, as the tax can represent a significant portion of the overall cost. The payment of SDLT must be made within a specified period after the completion of the property transaction, and it is the buyer’s responsibility to ensure the tax is paid

Title Deeds

Title deeds are legal documents that provide evidence of ownership and other rights associated with a particular property. Title deeds are an important component of the property ownership and conveyancing process, as they help to establish a chain of ownership and ensure that a property can be legally sold or transferred.

Title deeds typically include a variety of information about the property, including its legal description, ownership history, any restrictions or covenants that apply to the property, and any rights of way or easements that may affect it. Title deeds may also include information about mortgages or other loans secured on the property.

Title deeds are typically held by a solicitor, conveyancer, or other legal representative, although in some cases, they may be held by the property owner themselves. When a property is sold or transferred, the title deeds must be transferred to the new owner, along with any other necessary legal documentation.

Overall, title deeds are an important component of the property ownership and conveyancing process in the UK, as they provide essential information about a property’s ownership history and legal status.

UBO (Ultimate Beneficial Owner)

In UK mortgage lending, a UBO, or Ultimate Beneficial Owner, refers to the person or people who ultimately own or control more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company and its management. This concept is especially relevant in the context of mortgage lending to companies or trusts, where the lender needs to identify the UBOs to comply with anti-money laundering regulations and know-your-customer (KYC) requirements. Identifying the UBO helps ensure transparency and mitigates the risk of financial crimes. Whilst it is nothing for a bridging lender to be scared of, extra care and due diligence needs to be applied to ensure you know the origins of the ownership and monies being used.

Unmortgageable

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.

Unsecured lending

A loan that is not secured by collateral, typically requiring a higher credit score and more favorable terms for the borrower.

Valuation

As with any normal property purchase, the property has to be valued by the lender to ensure that there money is protected and the only way of doing this accurately is by a full survey or valuation. In bridging finance, there are 3 different values usually noted by the valuer. They are:

1. Open Market Value (OMV): This is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing. OMV assumes that both parties are knowledgeable, prudent, and not under any compulsion. It represents the full, unrestricted value of a property in a normal market.

2. 180-Day Valuation: This figure is used to estimate the value of a property if it needs to be sold within a 180-day period. It is typically lower than the OMV because it factors in the potential for a quicker sale, often necessitated by circumstances like financial distress. This valuation assumes a more limited marketing period and potentially fewer buyers, resulting in a lower price than the OMV.

3. 90-Day Valuation: Similar to the 180-day valuation, this figure represents the estimated value of a property if it were to be sold within a 90-day timeframe. It’s often used in situations where an even more rapid sale is required. The 90-day valuation is usually lower than both the OMV and 180-day valuation, as it reflects the urgency and potential for an even lower sale price due to the shorter marketing period and reduced negotiation time.

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 (as noted above):

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. This 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.

Yield

Rental yield, in relation to a Buy to Let investment property, is a measure of the return on investment (ROI) you can expect to earn from renting out the property. It is typically expressed as a percentage and helps investors assess the profitability of their property investment. There are two main types of yield calculations: gross yield and net yield.

Gross yield

Gross yield is calculated by taking the monthly rental income and multiply it by 12 to get the annual rental income. You then divide that figure by the property’s purchase price. Finally, you multiply that figure by 100 to get your gross rental yield percentage.

For example, if you purchase a property for £200,000 and expect an annual rental income of £12,000, the gross yield would be 6%.

Basically, £12,000 annual income divided by the property purchase price of £200,000 x 100 gives you the number 6. This is 6% yield.

Net Yield

Net yield provides a more accurate reflection of the investment’s profitability by taking into account all associated costs, such as mortgage payments, maintenance, insurance, property management fees, and other expenses. To calculate net yield, subtract these annual costs from the annual rental income, then divide by the purchase price and multiply by 100.

For example, if your annual rental income is £12,000, but your total annual costs amount to £4,000, the net annual rental income would be £8,000. The net yield calculation would be 4%.