A floating rate (also called a variable or adjustable rate) is an interest rate on a CRE loan that resets periodically based on a benchmark index, now almost universally SOFR, plus a fixed credit spread. When the index moves, the all-in rate moves with it, so the borrower’s debt service changes at every reset.
How is a floating rate set?
The all-in rate is the index plus the spread. A loan priced at SOFR + 250 basis points with SOFR at 4.30% carries a current rate of 6.80%.
Floating-rate loans are standard for transitional CRE strategies: bridge loans, construction loans, and value-add acquisitions where the borrower expects to refinance into permanent fixed-rate debt within one to three years. The advantage is flexibility, with no prepayment penalties and the ability to repay at any time. The tradeoff is exposure to interest rate volatility.
How do borrowers manage floating-rate risk?
Every SOFR movement directly affects debt service, DSCR, and cash-on-cash returns. A 100-basis-point increase in SOFR on a $25 million loan adds $250,000 in annual interest expense, enough to turn a performing loan into a covenant breach.
Most floating-rate CRE lenders therefore require the borrower to purchase an interest rate cap, which puts a ceiling on the benchmark rate. Some borrowers go further and execute an interest rate swap to convert the exposure into a synthetic fixed rate. The choice between caps, swaps, and unhedged exposure depends on the rate outlook, the hold period, and the borrower’s risk tolerance.
How floating-rate loans show up in LoanBoss
LoanBoss models every floating index, day count convention, and business day adjustment, and re-amortizes agency floaters each month based on the reset for that period. It monitors floating-rate exposure across the portfolio, tracks cap expirations, and runs rate scenarios to show the DSCR impact on every loan.
Frequently Asked Questions
What index do floating-rate CRE loans use?
Almost universally SOFR, plus a fixed credit spread. The SOFR component resets periodically and the spread stays constant for the life of the loan.
Why do lenders require a cap on a floating-rate loan?
Because a rise in SOFR flows straight into debt service and DSCR. A cap limits the benchmark rate, which protects coverage if rates rise.
Can a floating-rate loan be prepaid?
Yes. Floating-rate loans carry no prepayment penalties and can be repaid at any time, which suits transitional strategies that plan to refinance into fixed-rate debt.
Related Terms
- SOFR
- Interest Rate Cap
- Basis Point
- Bridge Loan
- Fannie Mae DUS
- Floating-Rate Loan Re-Amortization and SOFR Index Tracking for Borrowers
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary