Commercial Property FinanceGlossary

The gradual repayment of a loan through scheduled payments of capital and interest. A fully amortising facility is repaid by the end of its term, while a partly amortising facility leaves a final balance to be cleared or refinanced.

A fee charged by the lender for setting up a loan, typically expressed as a percentage of the total facility. Arrangement fees on commercial mortgages usually range from 1% to 2%, while bridging and development finance facilities may carry higher fees. This cost is normally deducted from the loan advance or added to the facility.

The Bank of England interest rate used as a reference point for many UK lending products. A variable commercial finance rate may be expressed as Base Rate plus a lender margin, so the borrower's payable rate can change when Base Rate changes.

A charge that may apply when a fixed-rate loan is repaid, restructured, or refinanced before the end of its fixed period. The calculation depends on the facility documents and market conditions, so it should be checked alongside any early repayment charge.

A funding strategy that combines short-term bridging finance for acquisition or refurbishment with a planned move onto a longer-term investment mortgage once the property is lettable and meets the lender's criteria.

A short-term secured loan used to bridge the gap between a purchase and longer-term financing or a sale. Bridging loans are commonly used by property investors and developers who need to move quickly on acquisitions, fund refurbishments, or cover a timing gap in their cashflow. Terms typically range from 1 to 24 months with interest charged monthly or rolled up.

A repayment structure in which the capital is due as one lump sum at the end of the loan term. Interest may be serviced monthly, retained, or rolled up depending on the facility.

The layers of money used to fund a property transaction or development. A capital stack can include senior debt, mezzanine finance, preferred equity, and the borrower's own equity, with each layer carrying a different risk and repayment priority.

A long-term loan secured against commercial or semi-commercial property, used to purchase, refinance, or release equity from business premises. Commercial mortgages typically run for 3 to 25 years and are assessed on both the property value and the borrower's ability to service the debt. Lenders will evaluate rental income or business revenue depending on whether the property is owner-occupied or investment.

An allowance within a development budget for unforeseen costs or changes during construction. Lenders examine whether the contingency is proportionate to the scheme, build programme, procurement route, and level of project risk.

A contractual promise in a loan agreement. Financial covenants can require a borrower to maintain measures such as LTV, ICR, or DSCR, while information covenants can require accounts, rent rolls, or progress reports to be supplied.

The initial amount of funding released by a lender at the start of a development finance facility, before any construction work begins. Day one advance covers the land purchase cost and is typically 60% to 70% of the site value. The remaining facility is drawn down in stages as the build progresses and is verified by a monitoring surveyor.

A security document commonly granted by a limited company to a lender. It can create fixed and floating charges over company assets and is separate from the legal charge registered against a specific property.

Net operating income divided by the outstanding loan amount, expressed as a percentage. Unlike ICR or DSCR, debt yield does not depend on the interest rate or loan term and gives a lender another view of income resilience.

An increased rate of interest that may apply after a payment default or another event of default defined in the facility documents. The circumstances, rate, and calculation basis should be reviewed carefully in the loan agreement.

The borrower's cash contribution towards a property purchase. The deposit is distinct from other transaction costs such as valuation fees, legal fees, taxes, and any lender arrangement fee.

A specialist lending facility designed to fund the construction or significant refurbishment of residential or commercial property. The loan covers land acquisition and build costs, with funds released in stages as the project progresses. Development finance is assessed on the viability of the scheme, the developer's track record, and the projected end value (GDV) of the completed project.

An initial indication from a lender that they are willing to provide finance based on a summary of the proposal, before full underwriting and due diligence takes place. A DIP gives the borrower confidence that funding is likely available and is often used to support offers on property purchases. It is not a binding commitment and remains subject to valuation, legal checks, and full credit approval.

The process of releasing loan funds, either as a lump sum or in stages. In development finance, drawdowns are made progressively as construction milestones are reached and verified by a monitoring surveyor. Each drawdown request is assessed against the agreed build programme and cost schedule before funds are released.

A key metric used by lenders to assess whether a property generates enough income to cover its debt obligations. DSCR is calculated by dividing the net operating income by the total annual debt service. A ratio of 1.0x means income exactly covers the repayments; most commercial lenders require a minimum DSCR of 1.25x to 1.50x to provide a comfortable margin of safety.

The checks completed before a lender commits and releases funds. These can include credit assessment, valuation, legal title, leases, planning, environmental matters, construction costs, borrower experience, and the proposed repayment strategy.

A certificate that records a property's energy-efficiency rating and recommendations for improvement. EPC status can affect the letting, value, refurbishment scope, and financeability of commercial and residential investment property.

The borrower's own capital in a transaction or the value remaining in a property after secured debt is deducted. Lenders consider both the amount and the source of equity when assessing alignment and risk.

A charge applied when a borrower repays a loan, calculated as a percentage of the original loan amount or the outstanding balance. Exit fees are common in bridging finance and typically range from 1% to 2%. Some lenders waive exit fees on certain products, so it is important to factor this cost into the total cost of borrowing when comparing facilities.

The plan for how a borrower intends to repay a short-term loan such as a bridging facility or development finance. Common exit strategies include selling the completed development, refinancing onto a long-term commercial mortgage, or repaying from the proceeds of another property sale. Lenders scrutinise exit strategies carefully as they represent the primary route to repayment.

The total funding made available under a finance agreement. A facility can be released in one payment or through several drawdowns and may include amounts reserved for interest, fees, or construction costs.

The primary legal claim a lender holds over a property used as security for a loan. In the event of default and subsequent sale, the first charge holder is repaid before any other secured creditors. First charge lending carries lower risk for the lender and therefore typically attracts lower interest rates compared to second charge or mezzanine positions.

Security over a changing pool of business assets, such as stock, receivables, or certain bank accounts. It normally allows the company to deal with those assets until the charge crystallises under the terms of the security document.

Ownership of the property and the land on which it stands without a lease expiry. A lender still reviews title restrictions, rights, occupational leases, and other matters that may affect the freehold security.

The estimated total market value of a completed development project once all units are built and sold or let. GDV is a critical metric in development finance, as lenders use it to calculate the maximum loan amount they will advance. A lender might offer up to 65% LTGDV, meaning the total facility cannot exceed 65% of the projected end value.

Annual gross rent divided by the property price or value, expressed as a percentage. It is a quick comparison measure but does not deduct operating costs, voids, incentives, or finance costs.

A summary of the main proposed finance terms, commonly covering loan amount, term, pricing, fees, security, covenants, and key conditions. Heads of terms are usually indicative and subject to valuation, due diligence, legal work, and final credit approval.

A measure of how comfortably a property's rental income covers the interest payments on a loan. ICR is calculated by dividing the annual gross or net rental income by the annual interest cost. Most commercial mortgage lenders require an ICR of at least 125% to 150% at a stressed interest rate, ensuring the property generates sufficient income even if rates rise.

A repayment structure where scheduled payments cover interest but do not reduce the capital balance. The original capital must normally be repaid or refinanced at the end of the term.

Property held primarily to produce rental income, capital growth, or both rather than for occupation by the borrower's own trading business. Underwriting typically focuses on the asset, leases, tenants, rental income, and exit options.

A right to occupy or use property for the period and on the terms set out in a lease. Lenders review the remaining term, ground rent, service charges, restrictions, repairing obligations, and any superior landlord requirements.

The agreed period from drawdown until the loan must be repaid. The term influences pricing, repayment structure, affordability, and the credibility of the borrower's exit strategy.

The ratio between the total loan facility and the total cost of a development project, including land acquisition and build costs. LTC is used alongside LTGDV to determine the maximum borrowing available on a development scheme. Typical LTC ratios range from 70% to 90%, meaning the developer needs to contribute equity of 10% to 30% of total project costs.

The ratio between the total loan facility and the gross development value of the completed project. LTGDV caps the maximum amount a lender will advance regardless of the project costs. Typical LTGDV limits are 60% to 70%, ensuring there is a sufficient margin between the loan and the projected end value to protect the lender.

The ratio of the loan amount to the market value of the property being used as security, expressed as a percentage. An LTV of 75% means the lender is advancing three-quarters of the property's value, with the borrower providing the remaining 25% as equity. Lower LTV ratios generally attract better interest rates as they represent lower risk for the lender.

The lender's contractual percentage added to a reference rate such as SONIA or Bank Rate. The total payable rate can therefore move even where the margin itself remains fixed.

The estimated amount for which an asset should exchange on the valuation date between a willing buyer and willing seller in an arm's-length transaction after proper marketing, subject to the detailed assumptions in the valuation.

A layer of funding that sits between the senior debt (first charge) and the developer's own equity in a project. Mezzanine finance is secured via a second charge on the property and is used to reduce the amount of cash equity a developer needs to contribute. It carries higher interest rates than senior debt due to the increased risk of the subordinated position.

A property containing more than one use, such as a retail unit with flats above or an office with residential accommodation. The use mix can affect valuation, lender appetite, affordability assessment, tax treatment, and regulation.

A surveyor appointed for the lender to review a development before and during construction. The monitoring surveyor commonly reports on costs, progress, remaining work, contingency, programme, and drawdown requests.

Property income remaining after normal operating expenses but before finance costs, tax, depreciation, and capital expenditure, subject to the lender's precise definition. NOI is commonly used in DSCR and debt-yield analysis.

Annual property income after specified operating costs divided by the property price or value. Because deductions vary, the calculation basis should be stated whenever net yields are compared.

Commercial property occupied by the borrowing business for its own trade rather than held mainly for third-party rental income. Lenders generally assess business cash flow and trading performance as well as the property security.

A promise by an individual to meet specified borrower obligations if the borrowing entity does not. The scope may be unlimited or capped, and independent legal advice may be required before it is signed.

Consent from the relevant planning authority for a proposed development or material change of use. A lender reviews the permission, conditions, obligations, expiry dates, and whether the funded scheme matches the approved plans.

The stage at which construction is substantially complete and the property can generally be used, subject to minor outstanding or snagging items. The formal meaning depends on the building contract and the professional certification issued.

A valuation prepared in accordance with the current RICS Valuation Global Standards and applicable UK national requirements. Lenders commonly require this form of independent valuation for secured property finance.

Replacing an existing finance facility with a new loan. A refinance may repay maturing debt, reduce cost, release equity, change the repayment structure, or move from short-term to longer-term funding.

An arrangement where the lender holds back a portion of the loan facility at the outset to cover interest payments for the agreed loan term. The borrower does not make monthly interest payments; instead, the interest is deducted from the retained amount. This is common in bridging finance where borrowers prefer not to service the debt during a short-term project.

The professional body that sets standards for chartered surveyors and regulated firms. Property lenders commonly instruct appropriately qualified RICS valuers to report on proposed security.

Interest that accrues on a loan and is added to the outstanding balance rather than being paid monthly. The total interest is repaid along with the capital at the end of the loan term. Rolled-up interest is frequently used in bridging finance and development finance, allowing borrowers to preserve cashflow during the project period.

A secondary legal claim on a property that ranks behind the first charge holder in priority of repayment. Second charge lending is used to raise additional funds against a property that already has a mortgage in place. Interest rates are higher than first charge loans to compensate for the increased risk, as the second charge lender is repaid only after the first charge holder.

A loan supported by a legal claim over property or other assets. If the borrower defaults, the lender may be able to enforce its security, subject to the facility documents, law, and any higher-ranking creditors.

A property combining commercial and residential accommodation, such as a shop with flats above. It is also described as mixed-use property, although lenders may use the terms differently when defining product criteria.

The primary layer of debt financing in a property transaction, secured by a first charge over the asset. Senior debt has the highest priority of repayment in the event of default, making it the lowest-risk position for the lender. In development finance, senior debt typically covers 60% to 70% of project costs, with any additional funding coming from mezzanine finance or the developer's own equity.

Testing how a proposal performs when important assumptions change. A lender may model higher interest rates, lower rents, longer voids, increased build costs, delayed sales, or reduced exit values.

A payment arrangement where the borrower makes regular monthly interest payments throughout the loan term, with the capital repaid at maturity. Serviced interest is the most common arrangement for commercial mortgages and investment properties where rental income provides a steady cash flow to cover the monthly cost. Lenders assess ICR to ensure the income comfortably covers these payments.

The benchmark interest rate that has replaced LIBOR for sterling-denominated loans in the UK. SONIA is published by the Bank of England and reflects the average rate paid on overnight unsecured transactions in the sterling money market. Commercial mortgage rates are commonly quoted as a margin above SONIA, for example SONIA + 2.5%, meaning the borrower's rate moves with the benchmark.

A company or other entity established for a specific asset, transaction, or development. Property investors often use SPVs to hold assets, but lender criteria, guarantees, tax, and legal implications vary.

An affordability or risk assessment using assumptions that are more conservative than the current position, such as a higher interest rate or lower rent. It helps a lender judge whether the debt remains serviceable if conditions worsen.

A market rate associated with exchanging floating and fixed interest payments for a stated period. It can influence the pricing and break costs of fixed-rate commercial finance but is not the same as the final rate offered to a borrower.

A document setting out the proposed commercial terms of a finance facility. It is often used interchangeably with heads of terms and normally remains subject to stated conditions and definitive legal documentation.

A distinct portion of a finance facility with its own release conditions, ranking, pricing, or purpose. Development loans are commonly advanced in tranches as verified work is completed.

The value of a property on the assumption that it is available without occupational tenants or occupiers. It can be relevant where the lender considers alternative repayment and enforcement scenarios.

A formal assessment of a property's market value carried out by a RICS-qualified surveyor on behalf of the lender. The valuation determines the maximum loan amount the lender will advance and may also assess the property's suitability as security. For development finance, valuations typically cover both the current site value and the projected gross development value on completion.

A measure of the average remaining lease term across a property or portfolio, weighted by rent or another stated basis. WAULT helps lenders and investors assess the duration and potential stability of contracted income.

The annual rental income generated by a property expressed as a percentage of its purchase price or market value. A property purchased for £1 million with annual rent of £70,000 has a yield of 7%. Yield is a key metric for property investors and lenders when assessing the viability of commercial investment properties and the potential return on capital.