The principal question as to whether an investor takes on a real estate project is whether the project makes financial sense. To do so, critical decisions must be made regarding the costs to renovate a property (or to build on an existing site) what type of revenue streams are expected, and what types of retailers will make the project work over time.
Another important decision involves how much will be spent in paying off commercial real estate loans. To do so, investors look to find out the interest rate for a loan and the annual percentage rate (APR) attached to the package. Indeed, they are useful tools to evaluate the overall cost of a loan, but knowing their differences are key.
This post will briefly explain the two.
The interest rate on a commercial real estate loan is the percentage that lender charges for the “privilege” of borrowing the money. After all, the lender has to make some money in exchange for the risk undertaken by letting the developer or investor. However, in detailing interest rates, the costs and fees involved with administering the loan are not considered.
The APR involves the entire cost of the loan, costs for closing costs, origination tasks, closing procedures and addressing any points to be assessed. As such, the APR can give prospective borrowers a complete and detailed view of what will be paid over the life of the loan.
However, not all APR’s are the same. For example, an APR published in a magazine or advertised online may not include some of the fees commonly hidden from public view, such as third party title and appraisal fees. Because of this, a lender’s Good Faith Estimate may be a better method of evaluating loan APRs.
If you have questions about choosing between different loan options, an experienced real estate attorney can advise you.