Glossary
A
Administrator
An Insolvency Practitioner appointed to either a Limited Company or Limited Liability Partnership.
Agreed Bid
An Agreed Bid is made at a discount to the Borrower's target rate or the Non-Agreed market rate (if lower). The Borrower benefits from a lower rate and, because Agreed Bids cannot be outbid, the investor benefits by securing a piece of the deal.
Auction
The process by which Investors compete to participate in a deal. Auctions take place in the Primary Market and last for a set period although the Borrower can choose to end the auction before the published end date.
B
Bid
A commitment by an investor to lend on a deal in the Primary Market. The contract to lend is made with the Borrower and bids may be Agreed or Non-Agreed (see the separate definitions)..
C
Capital Stack
Capital stack (two words) is the phrase we use to describe the aggregate capital requirement needed to fund a deal.
It generally comprises: senior debt (the lowest risk part of the stack); the CapitalStack (referred to as mezzanine or junior debt or subordinated debt (higher risk than senior debt but lower risk than equity), and; equity (the highest risk, first loss capital provided by the borrower and other equity investors)).
CapitalStack
CapitalStack (no space) is our word for the capital provided entirely through the CapitalStackers platform. The CapitalStack will usually be subordinated debt and rank behind senior debt but in some instances will be the senior debt.
Capitalstackers Trustees Ltd (CTL)
CTL is a 'not for profit' company limited by guarantee and controlled by the directors of Hallidays accountants, who are tasked with fulfilling its obligations. These obligations are laid down in a service agreement which dictates that all Investor client monies held in their eWallets are used to complete on deals or returned to the Investor's registered bank account in the event that a deal does not progress. CTL also acts as Security Trustee with regard to all property charged as loan security. CTL's actions in respect of this security are prescribed in the service agreement and determined by the Investor lending group through an established voting mechanism.
Cash Drag
A phrase used in P2P loan based crowdfunding to describe the effect of an investor having to pre-fund a lending account prior to the loan drawing down and triggering interest becoming payable by the Borrower. It can be an issue in Primary Market investments because the period between bidding and drawdown can be many weeks if the formal due diligence process becomes protracted - especially if bids need to be pre-funded. Tying up or allocating funds with no return in anticipation of the loan going live will drag down the overall return. Consequently, we seek to mitigate the cash drag impact by calling for bids to be funded only toward the end of the DD process but sometimes unforseen eleventh hour issues can cause delays which exacerbate the problem. However, cash drag is a feature of P2P lending and should be taken into account when choosing investments. At the moment, because allowances have to be monitored, ISA bids must be cash covered although this requirement is being reviewed by popular request. Watch this space.
CIL
Community Infrastructure Levy is a charge (typically formulaic) imposed by the local planning authority on a development. Like S106 liabilities, amounts due are payable in priority to any secured lending and must therefore be taken into account when appraising a development and calculating risk ratios.
Construction Management
This is a method of construction procurement whereby the Project Manager, on behalf of the developer, arranges and coordinates a number of works packages for the building of the property. The process is management intensive and carries a higher level of risk to the developer but is generally a cheaper solution than a Design & Build contract. Construction management may be appropriate on smaller, non-complex developments where there is a better than average profit.
Contract Retention
The deferred payment under a building contract held back by the developer to cover potential snagging costs. Typically, the amount will be 3-5% of the contract sum and deducted from each monthly certificate. Usually, 50% of the retention is paid at Practical Completion and the balance after a 12 month defects liability period.
Coupon
This is the interest rate payable to the investor. The coupon is calculated quarterly on investment loans and monthly on developments. See "Current Coupon" and "Deferred Coupon" for further details. Deals may pay a current coupon, deferred coupon or both.
Covenant
See Loan Covenant.
CTL
See Capitalstackers Trustees Ltd.
Current Coupon
The interest rate paid to you quarterly on investment loans. In circumstances where rental income is insufficient to meet the full coupon, any unpaid amount is added to your loan. Rates quoted are annualised and gross of tax.
D
Data Room
The online electronic document folder containing downloadable files relating to a particular deal. Each deal has its own discrete Data Room. Upon completion of the auction, access to the Data Room is restricted to successful Participants.
Deal Participant
An Investor who has successfully bid for a participation in a deal and who forms part (or all) of the CapitalStack.
Deal Room
The online electronic web pages detailing information in relation to a particular deal. Each deal has its own discrete Deal Room. Upon completion of the auction, access to the Deal Room is restricted to successful Participants.
Default
An event that gives rise to a breach of a lending covenant. For example, the borrower might covenant with the CapitalStackers lenders to maintain a loan-to-value ratio no greater than 75%. If the property value subsequently falls or interest is unpaid such that the loan becomes greater than 75% of the property value there is a breach of covenant. Should a default occur, the options available to the Investors will be detailed in the Loan Agreement. Defaults don't necessarily indicate a potential loss.
Deferred Coupon
The interest paid to you upon loan repayment. The interest is compounded and rolled up - monthly for development loans and quarterly for investment loans. All development loans are subject to deferred coupon only. Rates quoted are annualised and gross of tax.
Debenture
A form of loan security over all the assets of a Limited Company or Limited Liability Partnership. It includes powers for the lender to appoint an Administrator to manage the affairs of the Company.
Deed of Priority
See Priority Agreement.
Design & Build
The form of contract in which the professional design team (architect, engineer, key subcontractors, etc) are engaged by the main contractor who takes responsibility for design and offers an all inclusive 'fixed' price for the construction works. Any scope for movement in this 'fixed price' is dependent upon how well the works have been specified by the developer. An Employer's Agent is engaged by the developer and signs off the monthly certificates under which payments are made pursuant to the contract. The price can increase in certain circumstances (such as extensions of time for inclement weather which result in increased costs). The cost risk lies with the Contractor, subject to the contract specification.
Development
The construction of a new building or refurbishment of an existing one in accordance with a development plan, which will generally include: site assembly and acquisition, planning consent; demolition, construction, funding and, most importantly, the generation of profit for the developer.
Development Appraisal
A financial appraisal which analyses the components of a development and calculates the funding requirement and profitability of the scheme, together with upside and downside sensitivities.
Diversification
A financial appraisal which analyses the components of a development and calculates the funding requirement and profitability of the scheme, together with upside and downside sensitivities.
Due Diligence
In this context, Due Diligence is the process by which a new deal is analysed and assessed by CapitalStackers and the professional advisers. The work will include meeting with the borrower and assessing their background and track record; reviewing the development appraisal and borrower proposition and sensitising the financial models; visiting the property; highlighting potential risks; and ensuring that the appointment of - and subsequent output from - the professionals (lawyers, valuers etc) employed on behalf of the investors is satisfactory.
Duty of Care
(In the context of third party professionals advising CapitalStackers' investors) the requirement that such professionals act with appropriate watchfulness, attention, caution and prudence. If the professionals' actions do not meet this standard of care, then their acts may be considered negligent and result in a claim for damages.
E
Employer's Agent
A qualified professional property surveyor appointed under a design and build contract, with obligations to both the Employer (the Borrower) and Contractor. The Employer's Agent is responsible for signing off the (usually) monthly certificate of works completed by the contractor under the contract.
Equity
That part of the funding requirement sitting at the top of the capital stack and generally provided by the Borrower. It carries first loss risk and therefore warrants the highest return.
ERV
Estimated Rental Value. That amount which a property would be expected to let for currently in the open market.
F
Financial Covenants
See Loan Covenant.
Financial Guarantee
A form of legal document entered into by a guarantor in favour of the Borrower. A guarantor may be an individual or a corporate body and the liability under a guarantee my be limited by amount or type (for example, cost overrun or interest shortfall). If it is not backed by a separate legal charge entered into by the guarantor, the guarantee is referred to as "unsupported" - the equivalent of a written promise with no direct access to a guarantor's assets.
Fixed Legal Charge
A form of legal document entered into by the Borrower granting security over a property asset(s) in favour of the Lender. The charge confers rights to the Lender to appoint a LPA Receiver in the event of default under a loan agreement.
G
Gross Development Value
The value, at the date of assessment, of a development project which assumes completion of the building(s) in accordance with the planning consent and design specification.
Gross Interest Cover Ratio
See Interest Cover Ratio.
Guarantee
A legal agreement through which a guarantor contracts with a lender to cover certain liabilities of a borrower. For example, a company director might guarantee a loan taken out by the company, or a parent company might guarantee the liabilities of a subsidiary. The guarantee will usually be limited by amount and/or type of liability (e.g. cost overrun or interest). Essentially, it is a promise to cover some or all liabilities of the borrower in the event the borrower fails to do so. It is enforceable in law and the lender can pursue the guarantor through the Courts if necessary, but a guarantee does not give the lender any rights over the guarantor’s assets, unless the guarantor has specifically entered into a separate agreement providing the lender with security over those assets.
Guarantor
The person(s) or company liable under a guarantee.
I
ICR
See Interest Cover Ratio.
Insolvency Practitioner
A qualified individual authorised to act as an Administrator or LPA Receiver.
Inter Creditor Agreement / Deed
See Priority Agreement.
Interest Cover Ratio (ICR)
The ratio of rental income from a property to the interest accruing on debt secured against it. The ratio will usually be expressed as either Gross Interest Cover (the ratio of rental received to interest paid) or Net Interest Cover (the ratio of gross rental less associated property costs - such as ground rent, void costs and management costs) to interest.
Internal Rate of Return (IRR)
The annualised effective compounded return rate. We use IRR so you can compare like with like. Investment loans will usually have the coupon paid current quarterly whilst on a development loan the coupon is compounded monthly, rolled up and paid out at redemption. The IRR expresses these coupons as though interest were compounded and paid annually.
Investment
In the context of CapitalStackers, a property acquired or built by a borrower which generates rental income from one or more tenants.
Investment Yield
The yield on an investment property calculated using the current passing rent and taking into account Purchaser's Costs.
IRR
See Internal Rate of Return. This is the return taking into account the compounding of interest. Rates quoted are annualised and gross of tax.
J
Junior Debt
Sometimes referred to as "mezzanine" or "subordinated" debt. It is deferred to / ranks behind the Senior Debt such that when the property securing the debt is sold, Senior Debt is paid down in priority to the Junior Debt. Junior Debt is paid out in Priority to the Equity. Both Senior and Junior Debt are subordinated to S106 and CIL liabilities.
Junior Lender
The lender of the Junior Debt.
K
Know Your Customer (KYC)
The term used in financial services to describe the process of establishing the identity and bona fides of a client to assist in the prevention of fraud and money laundering. Standard procedures are imposed by the regulatory authorities.
KYC
L
Lease
The agreement between Lessor and Lessee which determines the rent and other terms and conditions of the Lessee's tenure of a property.
Lessee
A company, partnership or individual who agrees terms with a landlord for the occupation of all or part of a property.
Lessor
The landlord. Usually the freeholder of a property but sometimes the owner of a long lease (typicall 125 years or more) who has in turn sublet to occupational tenants.
LMA
See Loan Markets Association.
Loan Agreement
Loan Covenant
Loan Covenants are included in a Loan Agreement and most often determine the financial ratios which must be maintained throughout the loan term. These will generally include such measures as a maximum LTV and minimum ICR. Covenants can also cover non-financial matters such as key directors / employees remaining with the borrower firm. If a covenant is broken, the Loan Agreement will detail the options available to the lender.
Loan Markets Association (LMA)
An organisation whose members include the clearing banks and whose role is to develop standardised loan documentation, thereby improving efficiency of the loan documentation process and transparency between lenders.
Loan to Value (LTV)
The ratio of debt to the value of the property securing the debt. The Senior Debt LTV will be lower than the Junior Debt LTV (as the Junior Debt will always be subordinated to the Senior Debt). Within the CapitalStack, lower layers will have a lower LTV.
LPA Receiver
LPA stands for Law of Property Act. An LPA Receiver is appointed by a lender to take over and administer real estate property which has been charged to secure a loan. The LPA Receiver's powers are conferred by Statute and determined in the Legal Charge.
LTV
See Loan to Value.
M
Market Value (MV)
The value of a property as assessed by a qualified surveyor in accordance with industry practice as laid down by the Royal Institution of Chartered Surveyors.
Mezzanine Debt
Monitoring Surveyor (MS)
In this context, a surveyor employed by a lender to provide regular (generally monthly) reports as to the progress of a real estate development project. The type and complexity of the monitoring will be detailed in an appointment letter between the lender and the MS (with the terms of appointment also being agreed with the borrower).
MS
See Monitoring Surveyor.
MV
See Market Value.
N
Net Development Value
The Gross Development Value less the costs of legal, agency and any other sales related items (i.e. the net sales proceeds).
Non-Agreed Bid
A Non-Agreed Bid may be submitted at rate higher than the borrower's target. Investors win by offering the lowest rate and so are subject to being outbid at any time up to the auction close.
Net Interest Cover Ratio
See Interest Cover Ratio.
O
Over-Rented
A property is described as over-rented when passing rent is higher than would be achieved were the property vacant and available to rent on the open market.
P
Participant
See Deal Participant.
Participation
The face value of an individual investment in a deal being the result of a successful bid in the Primary Market or purchase through the Secondary Market irrespective of any premium paid or discount received. The total investment in any deal will be the aggregate of these participations, plus any premium paid and minus any discount received in the Secondary Market.
PC
See Practical Completion.
Phasing Contribution
Cash generated from net sales proceeds (i.e. receipts after deduction of agents and legal costs) which covers development costs thereby reducing the level of funding required from lenders. Typically will include: contract retention, senior interest, senior exit fee and contract retentions. On phased projects, early sales receipts will likely cover some of the ongoing construction costs.
POC
Practical Completion (PC)
The point at which a building project (or part thereof capable of being delivered separately) is complete, except for minor defects which can be fixed without undue interference or disturbance to an occupier.
Primary Market
Priorities Agreement
A formal legal agreement between Senior Lender, Junior Lender, any other lenders and the borrower which sets out, inter alia, their security ranking and rights to accelerate the security. The Senior Lender will be first ranking and the Junior Lender second ranking. The Senior Lender will usually impose restrictions (such as a notice period) on the Junior Lender’s ability to accelerate the security (i.e. call in the debt and appoint an insolvency practitioner).
Professional Team
Comprised of qualified third party consultants appointed by the borrower and/or the Senior Lender and/or CapitalStackers to advise on the property or development scheme. Typically, surveyors with expertise in property investment, valuation and building survey; structural engineers, mechanical and electrical consultants, cost consultants, project managers and monitoring surveyors. May also include specialist consultants in connection with, inter alia, environmental risk, asbestos removal, rights of light issues, etc.
Profit on Cost Ratio (POC)
The measure of viability on a development project and calculated as the profit net of all development and associated costs as a percentage of those costs. A developer will accept a lower POC ratio on lower risk developments and require a higher ratio on more complex, higher risk deals. Typically, the acceptable range is 15% - 25%. The appropriate ratio is used to determine the Residual Site Value.
Project Manager
A qualified professional consultant appointed by a developer (the Borrower) responsible for managing a development project with the aim of maintaining project integrity (i.e. costs and timescales in line with the project appraisal)
Purchaser's Costs
The costs associated with the acquisition of a property comprising, inter alia, stamp duty, agents fees and legal fees.
R
Residual Site Value
The value of a development site which, when taking into account appraised development revenues and costs, determines the required Profit on Cost Ratio.
Reversionary Yield
The yield on an investment property calculated using the current Estimated Rental Value ("ERV") and taking into account Purchaser's Costs. The Reversionary Yield will be higher than the current (or initial) Investment Yield if a property is Under-Rented.
S
S106 Agreement
The legal agreement between the local planning authority and the developer which obligates the developer to provide local amenities (typically affordable housing) or commuted sum (cash) in lieu. The commuted sum is registered against the title, will likely be index linked and ranks in priority to secured lenders. Essentially, it is a tax on the development and can be challenged if it makes a scheme unviable. See also CIL.
Secondary Market
That part of the platform membership area used by investors to buy and sell loan participations in deals which have already been completed in the Primary Market. There is no Borrower involvement in the Secondary Market - all transactions are between Investors who remain anonymous to each other and the Borrower.
Senior Debt
That debt which ranks first for repayment in priority to Junior Debt (if any) and Equity. S106 and CIL liabilities on a development rank in priority to Senior Debt (unless otherwise agreed by the local planning authority).
Senior Lender
The lender of the Senior Debt; likely to be a high street bank, challenger bank or debt fund.
Subordinated Debt
See Junior Debt.
T
Tenancy
The arrangement by which a property is occupied by a party other than the owner. See Lease. For residential property this is likely to be an Assured Shorthold Tenancy agreement.
Tenant
The occupier of a property (or part of it). Occupation may be pursuant to a lease, in which case the occupier is the lessee - or in the absence of a lease, under licence or without documentation, in which case it is a 'tenancy at will'.
U
Under-Rented
A property is described as under-rented when passing rent is less than would be achieved were the property vacant and available to rent on the open market.
V
Valuer
Void
That part of a property which is unoccupied. In multilet properties there may be multiple Voids.
Void Cost
The costs associated with a Void for the account of the Lessor. These costs will include empty property rates, insurance, utilities, security etc.
Void Period
The period during which a property (or part of a property if it is sub-divided for letting) is Void.
Y
Yield
The income return on a property investment - expressed as the net rental income as a percentage of the sum invested, including Purchaser's Costs.
Yield on Debt
The ratio of the net rental income received on a property expressed as a percentage of the debt secured against that property.
