An essential question in whether a business takes on a real estate project is whether the project makes sense financially. This involves making thorough estimates on the costs to renovate a property and balancing them against projected revenue streams.
One important aspect is determining how much will be expended in securing and paying off a commercial real estate loan. A common way to determine this is to find out the interest rate for a loan as well as the annual percentage rate (APR). Both are useful tools to evaluate the cost of a loan, but understanding the differences between them are key.
This post will briefly explain their differences.
The interest rate on a commercial real estate loan is fairly straightforward. It encompasses the percentage that you will be charged for borrowing the money. However, it does not include any of the costs and fees involved with administering the loan.
The APR involves the entire cost of the loan, including feeds for originating the loan, closing costs, and most importantly, points assessed on the loan. The APR commonly gives potential borrowers a comprehensive view of what will be spent over the life of the loan.
However, comparing different APR's may not always be a true indicator of what the loan may cost. For instance, a publicized APR may not include some of the fees commonly hidden from public view, such as third party title and appraisal fees. So as you evaluate loan options, it is helpful to review a lender's Good Faith Estimate.
If you have questions when evaluating loan options, an experienced real estate attorney can advise you.