ABSTRACT
The largest commodity utilized in real estate is capital, i.e. money. The total cost of capital can often be the determining factor between a project being viable and a project not being viable. This is especially true given the extremely capital intensive nature of real estate as an asset class and considering the amount of borrowed capital utilized in a real estate project. Therefore, a charge is assessed for deployed capital. This charge is interest and it is sized to compensate the lender of potential loss, use of the capital, expenses, inflation, risk, etc. The "simplest" form of an interest charge is Simple Interest. Compound Interest is as it sounds, i.e. interest that is compounded over each period. The two leading indices for floating rates are the Prime Rate and LIBOR. The Prime Rate is used predominantly in the United States and is based off a rate, the Federal Funds Rate, set by the US Federal Reserve.
