The Secured Overnight Financing Rate (SOFR) is a rate tied to the cost of interbank Treasury repurchases. It was created by the Federal Reserve and first published in April 2018, and is set to replace LIBOR (the London interbank offered rate) via a gradual phase-in period which began Jan. 1, 2022, and will end June 30, 2023. SOFR measures the overnight trading rate for the repurchases (repos) of U.S. treasury bonds, and is seen as a more stable source of market interest-rate information than LIBOR. Learn more about SOFR here.

SOFR is set to replace LIBOR by 2021, and this could have a significant impact on commercial real estate financing. Many loans include fallback language, which give lenders some flexibility in determining how to transition from LIBOR. A large number of loans will shift to a comparable SOFR automatically. If this clause isn’t in your mortgage, your lender may request an amendment to the document to clarify the transition. In most cases, this will result in the loan being pegged to a spread based on the prime rate, the lowest bank interest rate available to consumers. However, this automatic switch is not ideal, as it could lead to a variety of issues and inconsistencies.

As there are multiple possible scenarios, you should consider contacting your lender to discuss your specific financing packages if a transition plan is not clearly stated. Additionally, inaccuracies have been found during calculations of SOFR during the last 12 months, so it is important to be aware of this when considering SOFR as a benchmark rate.

The main advantage of using SOFR for commercial real estate financing is that it is a more reliable index than LIBOR. SOFR is based on the overnight trading rate for the repurchases (repos) of U.S. treasury bonds, which is unlikely to stop anytime soon. This makes it a more stable source of market interest-rate information than LIBOR, which measures interbank lending. Additionally, SOFR is not subject to manipulation like LIBOR, making it a more reliable index for commercial real estate financing.

Sources:

• www.commercialrealestate.loans/commercial-real-estate-glossary/sofr
• https://www.cmalert.com/search.pl?ARTICLE=174059

The main risk associated with SOFR for commercial real estate financing is the potential for inaccuracies during calculations. This could lead to inconsistencies in interest rates and other loan terms. Additionally, if SOFR is not widely adopted, most adjustable commercial real estate loans have a built-in switch mechanism that will kick in if LIBOR is no longer calculated. In most cases, this will result in the loan being pegged to a spread based on the prime rate, the lowest bank interest rate available to consumers. This could lead to higher interest rates and other issues.

You should consider contacting your lender to discuss your specific financing packages if a transition plan is not clearly stated. For more information, please see this article.

SOFR is a benchmark rate that is calculated by measuring the interest rates at which banks lend to each other (specifically short-term, unsecured lending). It is set to replace LIBOR by the end of 2021, and is expected to be more accurate and reliable than LIBOR. SOFR is also expected to be more stable than LIBOR, as it is based on actual transactions rather than estimates. In addition, SOFR is expected to be more transparent than LIBOR, as it is based on a larger sample size of transactions. As a result, SOFR is expected to be a more reliable and accurate benchmark for commercial real estate financing rates.

In addition to SOFR, other financing rates for commercial real estate include the prime rate, the lowest bank interest rate available to consumers, and the CMBS financing rate, which is based on the performance of commercial mortgage-backed securities. Additionally, Fannie Mae® and Freddie Mac® Multifamily loans also have variable rate options.

The best strategies for using SOFR in commercial real estate financing depend on the type of loan you are looking for. For floating-rate loans, such as CMBS financing and Fannie Mae® and Freddie Mac® Multifamily loans, it is important to understand how the switch from LIBOR to SOFR could impact interest rates. To do this, borrowers should consider the potential inaccuracies in SOFR calculations and the built-in switch mechanisms that could kick in if LIBOR is no longer calculated. In most cases, this will result in the loan being pegged to a spread based on the prime rate, the lowest bank interest rate available to consumers.

For fixed-rate loans, borrowers should consider the potential for SOFR to increase over time. Since SOFR is based on the overnight trading rate for the repurchases (repos) of U.S. treasury bonds, it is likely to increase as the Federal Reserve continues to raise interest rates. Borrowers should also consider the potential for SOFR to be more volatile than LIBOR, as it is based on a single market rather than a variety of markets.