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	Glossary
	The following glossary terms and/or terminology are those most frequently used in real estate financing, which are considered essential when loan applications are being reviewed by the lenders.
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Acceleration Clause A clause in a mortgage instrument that permits the lender to declare the entire balance due and payable in the event of a default on the mortgage terms. Alienation Clause The act of transferring rights in real property. Sometimes used to identify the clauses in a mortgage that allows the lender to declare the balance due and payable if the mortgaged property is sold. Approaches to Value The procedures used by appraisers to derive value indications. The three fundamental approaches are (1) sales comparison approach, (2) cost approach and (3) income approach. Basis Point The movement of interest rates or yields expressed in hundredths of a percent; that is, a change in yield from 7.45 percent to 7.75 percent would be termed an increase of 30 basis points. Capitalization The conversion of an income stream into a property valuation for purposes of appraisal. The process of converting income produced by an investment property into a meaningful value is called capitalization. The mathematical procedural is expressed as Net Annual Income/Capitalization Rate = Value. COFI or 11th District Cost of Funds This index, used primarily for ARMs with monthly interest rate adjustments, is calculated by the Federal Home Loan Bank of San Francisco. The 11th District represents the SAIF-insured savings institutions (savings & loan associations and savings banks) in Arizona, California and Nevada. The cost of funds reflects the interest rate paid by institutions for savings accounts, FHLB advances, money borrowed from commercial banks, and other sources. Construction Loan A short-term interim loan to finance the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses. Cost Approach In order to estimate value according to the cost approach, the appraiser determines what it would cost to replace its building today, subtracts from that the value lost to physical deterioration and obsolescence, and then adds the value of the land. Top Debt Service Coverage Ratio Cash flow determines how much money can be safely loaned on a property, or how much debt the property can support. This is done through the use of a debt service coverage ratio (DSC). The debt service coverage ratio is the net operating income (NOI) divided by the debt service or regular annual mortgage payments (principal plus interest). Direct Capitalization Method used to estimate value from annual operating income by applying a capitalization rate derived by analyzing sales of comparable properties and applying the formula I/V = R to each. Due-on-Sale-Clause A mortgage clause that calls for the payoff of a loan in the event of a sale or conveyance of the collateral prior to maturity of the loan. Gross Income Multiplier Referred to the relationship between sales price and income, expressed as ratio. A figure used as a multiplier of the gross income of a property to produce an estimate of the property's value. Ground Lease A lease in which the lessor pays all or most of the property expenses such as taxes, insurance, and repairs. A lease of land only on which the lessee usually owns the building or is required to build as specified by the lease. Such leases are usually long-term net leases; the lessee's rights and obligations continue until the lease expires or is terminated for default. Highest and Best Use The most probable, reasonable use which will support the highest percent value as of the effective date of the appraisal; that use which provides the greatest net return on the investment over a given period; that use, from among the reasonably probable and legal alternative uses, found to be physically possible, appropriately supported, and financially feasible which results in the highest land value; that use which fully develops the site's potential; or the most profitable use to which a property can be put. Income Approach An appraisal procedure in which the projected income of a property is mathematically converted to a value. The value of income-producing property can be determined by converting its projected net earnings into value through process known as capitalization. Interim Loan Or interim financing. A loan made with the expectation of repayment from the proceeds of another loan. Most often used in reference to a construction loan. Top Leverage The use of borrowed funds at a profit. An investor's use of borrowed money to increase return on cash investment. Leverage is profitable only when the return on investment is higher than the cost of the borrowed money. LIBOR Rate The acronym LIBOR stands for London Interbank Offered Rate. It is a money market index with an international flavor, which is a floating interest rate that serves as a base for many lending agreements. In recent years, homebuyers have been encountering ARMs (Adjustable Rate Mortgages) with interest rates linked to, for example, the 6-month LIBOR rate. Loan-to-Value Ratio The ratio of mortgage to property value, usually expressed as a percentage. Mechanic's Lien A statutory lien on a specific property for labor or materials contributed to a work of improvement. Net Operating Income (NOI) Effective gross income less the annualized operating expense equal NOI. The annual net income remaining after subtracting all fixed and operating expenses but before deducting financial charges such as debt service or recapture. Operating Expenses The cost of all goods and services used or consumed in the process of obtaining and maintaining income. (inclusive of Maintenance Expenses, Fixed Expenses and Reserves for Replacement). Participation Loan A mortgage loan made by two or more lenders, or a mortgage loan made by one lender in which one or more other lenders have purchased interests. Points A unit of measure for charges that amounts to 1 percent of a loan. One point is 1 percent of the subject loan. Prime Rate The Prime Rate is the interest rate charged by banks to their most creditworthy commercial customers (usually the most prominent and stable business customers.) The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis. The rates reported are based upon the prime rates on the first day of each respective month. Banks use the prime as a base to set rates for credit cards, home-equity loans, commercial real estate loan and other loans, including loans to small and medium-size businesses. Top Reconciliation The final step in the appraisal process, in which the appraiser reconciles the estimates of value received from the sales comparison, cost and income capitalization approaches to arrive at a final estimate of market value for the subject property. The figures yielded by each of the three approaches are called value indicators, meaning they give indications of what the property is worth but are not final estimates themselves. Sales Comparison Approach (Market Data Approach) The process of estimating the value of property through examination and comparison of actual sales of comparable properties; also called the direct market comparison approach. This is an excellent way to determine value because it reveals what buyers have paid or will have to pay for similar properties. Subordination To make a claim to real property inferior to that of another by specific agreement. Takeout Commitment A takeout commitment, sometimes called a standby commitment, is a promise to the builder/developer by an acceptable commercial lender to make a permanent real estate loan directly to the builder in the event the subject property (house, multi-units apartment or commercial property is not sold within a certain time limit, usually 12 to 18 months.) The commitment is usually in the form of a simple letter agreement and cost the builder at least half a point to one point payable upon delivery of the letter agreement. Treasury Bill One of the key interest rate index; referred to as a negotiable debt obligation issued by the US government and backed by its full faith and credit, having a maturity of one year or less Also called T-bill or US Treasury Bill. A Treasury bill is a certificate representing a short-term loan to the federal government that matures in three, six or 12 months. Treasury bills are sold at public auctions every week. Since these are public auctions, the Treasury must announce the size, date and time of the auction every week. Three and six-month bills are announced on Thursday for auction the following Monday. Yield Capitalization Method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investment's income pattern, value change, and yield rate. Also called Discounted Cash Flow Analysis because a discount rate is used to calculate the present value of anticipated future cash flows. Top

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