SOFR (Secured Overnight Financing Rate)
The benchmark interest rate that has replaced LIBOR for floating-rate commercial real estate loans. SOFR is based on overnight repurchase agreement transactions and is considered more reliable than LIBOR. Floating-rate loans are typically priced as SOFR plus a spread, with rate caps often required to limit interest rate exposure.
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Related Terms
Spread
The margin added to a base index rate (such as SOFR or Treasury) to determine a loan's interest rate. For example, a loan priced at "SOFR + 250" has a 2.5% spread over the SOFR index. Spreads reflect credit risk, property type, leverage, and market conditions. Lower spreads indicate more favorable pricing.
Rate Cap
A derivative contract that protects floating-rate borrowers from interest rate increases above a specified level. Lenders typically require rate caps for floating-rate loans. The borrower pays an upfront premium based on the cap rate, term, and notional amount. Rate caps have become significantly more expensive in volatile rate environments.
More Lending Terms Terms
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