Whatever types of property development funding you are looking for, you will come across different terminology which can sometimes be confusing. We have therefore put together a glossary of the more common terms in the funding market to give you a greater understanding of what is on offer.
Annual rental uplift
Many lease agreements will have an annual rental uplift built into them which ensures that rental income maintains its real value going forward. Without a regular uplift inflation will eat away at the real value of this income stream.
Bridging loan
A type of short-term finance often used for development/refurbishment projects or property acquisitions where funds are not yet available but soon will be.
Debt service ratio
This is a measurement of the cash available to service debt and demonstrates the viability of a property development.
Debt to equity ratio
This is a ratio highlighting equity in a project as a percentage of debt funding.
Development funding
This is a specific loan instrument used in the development of a property asset and traditionally of a short term nature.
Fixed interest rate
This is the fixed rate of interest charged on a loan for the full duration.
Gross development value
This is a vital figure when trying to raise development finance as it takes into account the estimated value of the property asset after construction/refurbishment.
Gross rental income
This is the annual rental income earned from a property before deducting any costs.
Interest coverage ratio
A measure of how many times annual interest on a debt is covered by annual income.
Interest only loan
A loan where only interest is paid on a regular basis with the capital repaid at the end of the term.
Land loan
A specific type of loan used to acquire land. This type of borrowing can attract higher interest rates and a lower loan to value ratio.
Line of credit
A flexible secured loan where a maximum loan balance is agreed but interest is only charged on the amount drawn down.
Loan to value ratio
This figure relates to the maximum borrowing defined as a percentage of the value of the asset(s) in question.
Long-term lending
This type of lending can be anywhere between one year and 30 years in duration on a fixed or variable interest rate and will require some form of security. Traditionally interest is paid monthly with the loan capital repaid at the end of the term.
Net rental income
This is the annual rental income from a property after deducting all associated costs.
Redevelopment lending
This is a specific loan agreement to cover the cost of redeveloping a property. These loans are short-term instruments of no more than a couple of years maximum.
Refinance risk
Where a borrower is unable to fulfil their financial obligations they may need to refinance existing debt. The refinance risk refers to the risk of not being able to refinance a debt.
Rental yield
This is simply the gross rental income divided by the value of the property asset shown as a percentage.
Report on title
Commonly used when applying for finance, a report on title is provided by a solicitor and will highlight any potential issues with the property title that may impact the lender.
Short-term lending
This term covers lending requirements which are traditionally up to 12 months with a fixed or variable interest rate. Interest is usually paid monthly with the capital repaid at the end of the term.
Term
This is the length of a loan agreement which will vary depending on the type of loan.
Valuation report
This is a detailed report which will estimate the open market value of a property asset taking into account potential risks and opportunities in the future.
Valuer
This is an independent third party which will estimate the open market value of a property asset and give their opinion on rental yields and re-let risk.
Variable interest rate
Some borrowing instruments will use a variable interest rate which means that the rate of interest charged will vary over the term of the loan.
For a more detailed overview of different types of property finance (including reading real life case studies) visit our resources page which is written by finance experts, Hank Zarihs.
Good Collection of terminology for funding market.