Commercial Mortgage & Finance Glossary

Commercial Property Terms Explained

Commercial property finance comes with its own language.

Terms such as LTV, DSCR, debenture, personal guarantee, vacant possession value, tenant covenant and exit strategy can appear during a commercial mortgage application without always being clearly explained.

Understanding these terms can make it easier to compare finance, speak with lenders and solicitors, and understand the commitments being considered.

This glossary explains common terminology you may encounter when purchasing, refinancing or raising finance against commercial property.

A

Amortisation

Amortisation is the gradual repayment of borrowing over an agreed period.

With an amortising commercial mortgage, regular payments normally include interest and an element of capital, gradually reducing the outstanding mortgage balance.

Annual Accounts

Financial statements produced for a business covering an accounting period.

Commercial lenders may use accounts to understand areas such as turnover, profitability, assets, liabilities and overall financial performance.

Arrangement Fee

A fee charged by a lender for arranging a commercial mortgage or other finance facility.

How and when the fee is paid varies between lenders. It may sometimes be payable upfront, on completion or added to the borrowing, subject to the lender's terms.

Asset Finance

Finance used to acquire assets such as machinery, vehicles or equipment.

Existing asset-finance commitments may be relevant when a commercial lender assesses a business's overall financial position.

Assets

Things of financial value owned by an individual or business.

Examples can include property, cash, machinery, equipment and investments.

B

Balloon Payment

A larger capital payment that may remain due at the end of certain finance arrangements.

It is important to understand whether the agreed payment schedule will repay the entire debt or leave a balance that needs to be repaid or refinanced.

Base Rate

An interest rate set by the Bank of England.

Some variable commercial lending may be priced using a reference rate plus an additional lender margin.

The precise pricing mechanism should be checked in the lender's terms.

Beneficial Owner

An individual who ultimately owns or controls a company, asset or other legal arrangement.

Identifying beneficial ownership can form part of lender, solicitor and anti-money-laundering checks.

Break Clause

A provision within a lease allowing one or more parties to terminate the lease before its contractual expiry date, subject to the terms of the clause.

Break clauses can be particularly important when assessing commercial investment property because they can affect the expected security of future rental income.

Bridging Finance

Short-term property finance generally intended to be repaid through a defined exit strategy.

It may potentially be considered where a conventional long-term commercial mortgage isn't immediately suitable, such as certain time-sensitive purchases, refurbishments or transactions involving properties requiring work.

C

Capital

Money invested into a business, property or transaction.

In commercial property finance, the term can also refer to the amount originally borrowed before interest.

Capital and Interest Mortgage

A mortgage where scheduled payments include both interest and repayment of the capital borrowed.

Assuming all contractual payments are made and the facility operates as intended, the balance reduces over the agreed repayment period.

Capital Raising

Borrowing additional money against an existing property.

A business or property investor might consider capital raising for purposes such as another property purchase, business investment or refurbishment, subject to lender criteria.

Cash Flow

Money moving into and out of a business.

A company can report accounting profits but still experience cash-flow pressure, so lenders may consider whether sufficient cash is available to meet mortgage and other financial commitments.

Commercial Investment Mortgage

A commercial mortgage generally used to purchase or refinance commercial property occupied by a third-party business tenant.

The lender may assess the property, rent, tenant, lease and borrower.

Commercial Lease

A legal agreement governing the occupation of commercial premises by a tenant.

It can contain provisions covering matters such as:

• Rent

• Lease term

• Rent reviews

• Break clauses

• Repairs

• Assignment

• Other landlord and tenant obligations

The lease can be a fundamental part of a commercial investment mortgage.

Commercial Mortgage

Borrowing secured against commercial property.

Commercial mortgages can potentially be used for purposes including buying business premises, purchasing commercial investment property or refinancing existing commercial property.

Commercial Valuation

A professional valuation undertaken on commercial property.

Depending on the property and transaction, the valuer may consider matters such as comparable evidence, rental income, market rent, leases, property condition and marketability.

Completion

The stage at which the legal transaction completes and mortgage funds are released in accordance with the lender's and solicitor's requirements.

For a purchase, this is normally when legal ownership transfers to the buyer.

Completion Fee

A fee that may be charged in connection with completion of a finance facility.

Always check the lender's terms to establish exactly which fees apply.

Covenant Strength

In commercial property investment, tenant covenant strength broadly describes the perceived financial ability and reliability of the tenant to meet its obligations under the lease.

The strength of a tenant can influence how a lender or commercial valuer views an investment.

Credit Search

A check of credit information relating to an individual or business.

Commercial lenders may perform credit checks on borrowers, companies, directors, shareholders or guarantors depending on the transaction.

D

Debenture

A form of security that a lender may take over assets of a company.

The precise legal effect depends on the documentation and security being granted.

A solicitor should explain the implications before the documents are signed.

Debt Service

The payments required to service borrowing, which can include interest and capital repayments depending on the finance structure.

Debt Service Coverage Ratio (DSCR)

A measure used in commercial lending to compare income or cash available to service debt with the payments required on that debt.

The exact calculation and minimum requirement vary between lenders.

Deposit

The portion of a property purchase being funded without the proposed mortgage.

Commercial mortgage deposit requirements vary according to the lender, borrower, property and transaction.

Dilapidations

The term commonly used in commercial property for repair or reinstatement obligations associated with breaches of a tenant's lease responsibilities.

Potential dilapidation liabilities should be understood when entering or leaving commercial premises.

Director's Loan

Money owed between a company and one of its directors.

Director's loan balances can be relevant when a lender reviews company accounts and the overall financial position.

Drawdown

The release of funds under an agreed finance facility.

Some finance arrangements may allow money to be drawn in stages rather than all at once.

E

Early Repayment Charge (ERC)

A charge that may apply if borrowing is repaid, refinanced or reduced earlier than permitted under the finance agreement.

Commercial borrowers expecting to sell or refinance should consider ERC provisions carefully.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortisation.

It is one measure that may be used when analysing the operating performance of a business.

It shouldn't automatically be treated as the same as cash available to make mortgage payments.

Equity

The difference between a property's value and borrowing secured against it.

For example, if a property is worth £500,000 and has a £300,000 mortgage, the simplified equity position would be £200,000.

Selling costs, taxes and other liabilities aren't reflected in this simple calculation.

Exit Strategy

The planned method for repaying a finance facility.

This is particularly important for short-term borrowing such as bridging finance.

Potential exits could include:

• Sale of property

• Refinance

• Repayment from another identifiable source

An intended refinance isn't guaranteed and needs to be realistically considered before entering short-term borrowing.

F

Facility

The finance arrangement provided by a lender.

The facility terms establish matters such as the amount, interest, repayment structure, term, fees and security.

Fixed Interest Rate

An interest rate that remains fixed according to the terms of the finance agreement for an agreed period.

A fixed rate can provide greater certainty over the interest rate during that period, but the facility may also contain early repayment provisions.

Freehold

A form of property ownership where the owner generally owns the property and land indefinitely, subject to the title and applicable law.

Commercial property can be either freehold or leasehold.

Full Repairing and Insuring Lease

Often abbreviated to FRI lease.

Broadly, this is a type of commercial lease under which significant repairing and insurance responsibilities may fall on the tenant, although the precise obligations depend on the actual lease.

Legal advice should be obtained on the specific terms.

G

Gross Rent

Rental income before deducting expenses associated with owning and operating the property.

Gross Yield

A simplified measure comparing annual rental income with the property's purchase price or value.

A basic calculation is:

Annual rent ÷ Property value × 100

Gross yield doesn't account for financing costs, vacancies, repairs, tax or other expenditure.

Guarantor

An individual or entity that provides a guarantee supporting another borrower's obligations.

The legal consequences of providing a guarantee should be understood before signing.

H

Head Lease

A lease under which further interests or subleases may exist.

Lease structures can become complex, particularly in multi-unit or mixed-use property, and should be reviewed by the solicitor.

Holding Company

A company that owns shares or interests in other companies.

Where a commercial mortgage involves a group of companies, the lender may want to understand the complete corporate structure.

I

Indicative Terms

Initial lending terms provided before the lender has completed full underwriting, valuation and legal due diligence.

Indicative terms should not be confused with a formal mortgage offer.

They may change as more information becomes available.

Interest Cover

A measure comparing income available from an investment or business with the interest cost of borrowing.

Commercial lenders can apply their own interest-cover calculations and minimum requirements.

Interest-Only Mortgage

A mortgage structure where contractual payments primarily cover interest rather than progressively repaying the original capital balance.

The outstanding capital must ultimately be repaid through an acceptable repayment strategy.

Availability and criteria vary between lenders.

Investment Value

In commercial property, a valuation can consider the property as an investment producing income.

Factors such as rent, tenant, lease and market yield can therefore influence value.

J

Joint and Several Liability

A legal concept that can potentially allow a lender or creditor to pursue parties individually as well as collectively for obligations covered by the agreement.

Where this applies, the legal implications should be explained by a solicitor.

L

Lease

A legal agreement giving a tenant the right to occupy property according to specified terms.

Commercial leases can materially affect mortgage underwriting and property valuation.

Leasehold

A form of property ownership or occupation for a defined period under a lease.

Where commercial property being purchased is leasehold, the lender and solicitor may need to consider the remaining lease term and its conditions.

Lender's Legal Fees

Commercial mortgage lenders may incur legal costs in establishing their security.

Depending on the facility, the borrower may be responsible for some or all of those costs.

Liabilities

Financial obligations owed by an individual or business.

Examples can include:

• Loans

• Mortgages

• Asset finance

• Overdrafts

• Tax liabilities

• Other debts

Loan-to-Cost (LTC)

A ratio comparing the amount borrowed with the total cost of a project or transaction.

It is particularly relevant to certain development and refurbishment finance arrangements.

Loan-to-Value (LTV)

The mortgage expressed as a percentage of the property's value used by the lender.

For example:

Property value: £500,000

Mortgage: £350,000

LTV: 70%

A lender's maximum LTV varies according to its criteria and the transaction.

M

Management Accounts

Financial information produced during a company's current accounting period.

Management accounts can help a lender understand more recent trading performance where the latest annual accounts are several months old.

Market Rent

An assessment of the rent a property might reasonably achieve in the market under appropriate conditions.

The market rent and contractual rent currently being paid by a tenant aren't necessarily the same.

Mortgage Term

The agreed duration of the mortgage or lending facility.

Commercial mortgage terms vary depending on the lender, property, borrower and finance structure.

Mixed-Use Property

Property containing both commercial and residential elements.

For example:

Ground floor shop + residential flat above

Mixed-use property is also commonly described as semi-commercial property.

N

Net Rent

Rental income remaining after specified costs have been deducted.

Exactly which costs are included depends on the context, so establish how the figure has been calculated.

Net Yield

A property yield calculation that attempts to account for certain costs rather than looking only at gross rental income.

There is no benefit in comparing two quoted net yields unless they have been calculated consistently.

O

Offer

A formal lending offer sets out the terms on which a lender is prepared to provide finance, subject to its conditions.

This should be distinguished from initial or indicative terms.

Owner-Occupied Commercial Mortgage

A commercial mortgage generally used where the borrower's own business operates from the property being financed.

The lender may place significant emphasis on the financial performance and ability of the trading business to service the borrowing.

P

Personal Guarantee (PG)

A legal commitment made by an individual to support obligations of another borrower, commonly a limited company.

If the borrowing company fails to meet obligations covered by the guarantee, the guarantor may face personal liability.

This is a significant commitment and appropriate legal advice should be obtained.

Planning Permission

Formal permission that may be required for certain property development or changes.

The planning position can affect commercial mortgage lender appetite and valuation.

Portfolio

A collection of properties owned by an investor or business.

Commercial lenders may request details of an applicant's wider property portfolio when assessing borrowing.

Portfolio Schedule

A document summarising properties within an investor's portfolio.

It may include:

• Address

• Property value

• Mortgage balance

• Lender

• Rental income

• Ownership

Principal

The original or outstanding capital amount borrowed, excluding interest.

Profit and Loss Account

A financial statement showing a business's income and expenditure over a period and the resulting profit or loss.

Commercial lenders may review this when assessing business performance.

R

Refinance

Replacing existing borrowing with a new finance arrangement.

Reasons for refinancing can include:

• Existing facility approaching maturity

• Reviewing borrowing terms

• Raising additional capital

• Restructuring debt

Rent Review

A mechanism within a commercial lease for reviewing the rent at specified points.

The outcome depends on the lease terms and applicable circumstances.

Repayment Mortgage

A mortgage where scheduled payments include both interest and capital, gradually reducing the outstanding balance.

Rental Coverage

A lender's assessment of whether property rental income provides sufficient coverage for the proposed borrowing.

The precise calculation differs between lenders.

Rent Roll

A schedule summarising the rental income produced by a property or portfolio.

It may include details of tenants, units, rents and lease terms.

S

Security

Assets or legal rights provided to support borrowing.

For a commercial mortgage, the property will normally form part of the lender's security.

Additional security may sometimes be requested.

Semi-Commercial Property

Property containing both commercial and residential elements.

Examples include:

• Shop with flat above

• Office with residential accommodation

• Restaurant with flats above

These properties can require specialist mixed-use mortgage criteria.

Service Charge

A charge associated with services, maintenance or management of a property or development.

Service-charge arrangements should be considered when analysing the overall cost of occupying or owning commercial premises.

Special Purpose Vehicle (SPV)

A company established for a particular purpose, such as holding property.

Not every commercial mortgage requires an SPV, and creating a company solely because it appears to be standard practice isn't necessarily appropriate.

Ownership structure should be considered alongside lender, accounting, legal and tax advice.

Source of Funds

Evidence explaining where money being used in a transaction has come from.

For a commercial property deposit, this could involve demonstrating funds originating from business savings, personal savings, sale proceeds or another acceptable source.

Stress Test

An assessment designed to consider whether borrowing remains supportable under specified assumptions, such as a higher interest cost.

Different lenders use different approaches.

T

Tenant

The individual or business occupying property under a tenancy or lease.

For commercial investment mortgages, the identity and financial position of the commercial tenant can be important.

Tenant Covenant

The perceived ability of a tenant to fulfil its obligations under a commercial lease.

See also Covenant Strength.

Tenure

The legal basis on which property is owned, such as freehold or leasehold.

Term

The duration of a mortgage, loan or lease.

Always establish which type of term is being discussed.

For example, a commercial mortgage could have one term while the tenant's commercial lease has a completely different remaining term.

Trading Business

A business actively carrying out commercial activity rather than simply holding an investment.

For an owner-occupied commercial mortgage, the financial performance of the trading business can be central to underwriting.

Turnover

The total revenue generated by a business over a specified period before deducting business expenses.

High turnover doesn't necessarily mean high profitability or strong mortgage affordability.

U

Underwriting

The lender's assessment of a finance application.

Commercial underwriting may consider:

• Borrower

• Business

• Accounts

• Credit

• Deposit

• Property

• Rental income

• Tenant

• Lease

• Security

• Purpose of borrowing

Commercial cases can involve more individual assessment than standard residential mortgage applications.

Unencumbered Property

Property that doesn't currently have borrowing secured against it.

This doesn't automatically mean the entire property value can subsequently be borrowed.

Any new lending remains subject to lender criteria.

Unexpired Lease Term

The amount of time remaining before a lease reaches its contractual expiry date.

This can be important to both lenders and commercial valuers.

V

Vacant Possession

Property available without an existing occupier having the right to remain under the relevant arrangement.

The legal position should be confirmed by the solicitor.

Vacant Possession Value

An assessment of what a property may be worth without the benefit of an existing tenancy or lease.

A commercial lender may consider this alongside an investment valuation.

Valuation

An assessment of property value undertaken for the lender.

A lender's valuation is primarily for the lender's purposes and shouldn't automatically be treated as a comprehensive building survey for the buyer.

Variable Interest Rate

An interest rate that can change in accordance with the terms of the lending facility.

If the applicable rate increases, borrowing costs can increase.

Void Period

A period when an investment property or unit has no rent-paying tenant.

Investors should consider whether they could continue meeting mortgage and property costs during a void.

W

Working Capital

Money available to support the day-to-day operation of a business.

This can be particularly important when purchasing business premises.

Using a large proportion of business cash for a commercial property deposit may reduce the working capital available for:

• Payroll

• Stock

• Suppliers

• Tax

• Equipment

• Unexpected expenditure

The commercial mortgage shouldn't be considered separately from the business's wider liquidity requirements.

Y

Yield

A measure used to compare property income with property value or purchase price.

A simple gross yield calculation is:

Annual rent ÷ Property value × 100

Yield is only one measure of a commercial property investment.

A higher yield doesn't automatically mean a property is a better investment.

Commercial Finance Terms Can Mean Different Things in Different Transactions

Commercial lending is highly case-specific.

The same term can sometimes be calculated or applied differently by different:

• Lenders

• Valuers

• Accountants

• Solicitors

For example, one lender's approach to DSCR or rental coverage may not be identical to another's.

When reviewing commercial mortgage terms, establish how the particular lender has defined and calculated the relevant figures.

Questions to Ask When You Don't Understand a Commercial Mortgage Term

If you're presented with terminology you don't recognise, ask what it means before proceeding.

Particularly important questions include:

What security am I giving the lender?

Am I providing a personal guarantee?

What happens if the company cannot make the payments?

Is the mortgage fully repaid by the end of the term?

Are there early repayment charges?

Is the interest rate fixed or variable?

What fees are payable?

What happens when the facility reaches maturity?

What conditions must be satisfied before completion?

Understanding the structure of the borrowing is more important than simply recognising the terminology.

How Cambs Ely Mortgages Can Help

Commercial mortgage terminology can appear complicated, but the underlying transaction should be understandable before you commit to it.

Cambs Ely Mortgages can help explain commercial finance options in straightforward terms and consider lending for:

• Owner-occupied commercial premises

• Commercial investment property

• Semi-commercial property

• Commercial refinancing

• Capital raising

• Bridging finance

• Property development finance

We can also help you understand the information lenders may require and how the proposed borrowing fits the property or business transaction.

We help business owners and commercial property investors in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.

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Important Information

This glossary provides general explanations of common commercial mortgage and property-finance terminology. Definitions have been simplified for educational purposes and shouldn't be relied upon as legal, accounting, tax, investment or personalised financial advice.

The precise meaning and effect of a term can depend on the lender's documentation, legal agreement and individual transaction.

Commercial mortgage criteria, interest rates, loan-to-value requirements, affordability assessments, fees and security requirements vary between lenders.

Some forms of commercial mortgage and business lending aren't regulated by the Financial Conduct Authority. The regulatory position depends on the circumstances of the transaction.

Personal guarantees, debentures and other security arrangements can create significant legal obligations. Appropriate legal advice should be obtained where required.