The annual percentage rate is the yearly rate charged for borrowing, or earned through investing, expressed as a percentage. When it comes to commercial real estate, APR is a number that borrowers and lenders alike look towards for the yearly cost of the loan over time according to the transaction’s terms. The APR will include fees associated with the transaction, but it will not take compounding into account.
How is APR Calculated?
To calculate APR, the periodic interest rate is multiplied by the number of periods in a year during which the rate is applied.
Fixed vs Variable APRs
Loans will have either a fixed or a Variable APR. A fixed APR has an interest rate that will not change for the duration of the loan or credit facility. A variable APR will have an interest rate that is subject to change.
What is the Difference Between APR and Annual Percentage Yield (APY)?
The APR only accounts for simple interest, while the APY takes compound interest into account. Consequently, the APY on a loan will be higher than the APR; therefore, lenders will highlight the APR to consumers rather than the APY. Conversely, banks will highlight the APY to investors looking to earn on their savings, as it will be a higher value than the APR. The Truth in Savings Act of 1991 mandated that both APR and APY be disclosed in advertisements and agreements.
How Does APR Pertain to Commercial Real Estate?
When a developer is looking to secure funding, such as for construction, they will be informed of the loan’s APR and the interest rate on the loan. The interest rate is simply the interest to be paid on the amount borrowed as determined by the lender, whereas the APR will include the fees along with the interest rate, providing a more complete cost of borrowing.
What Fees are Included in the APR for a Commercial Real Estate Loan?
Fees included in the APR for a Commercial Real Estate Loan may include the following:
- Origination fee: This is typically included on a mortgage
- Appraisal fee: The cost of having an appraisal on a property
- Underwriting fee: The fee paid to the person charged with assessing the risk of the loan and making the offer
- Points: Purchased from the lender to decrease the interest rate on the loan and paid for at the time of closing
- Broker’s fee: This would apply if the borrower is working with a Commercial Real Estate broker
- Building inspections: Fees associated with inspections carried out on the building
- Miscellaneous fees: These could include fees for document preparation, or credit reports.