A floating rate (also called a variable rate or adjustable rate) is an interest rate on a CRE loan that resets periodically based on a benchmark index — now almost universally SOFR (Secured Overnight Financing Rate) — plus a fixed credit spread. If your loan is priced at SOFR + 250 basis points and SOFR is 4.30%, your current all-in rate is 6.80%. When SOFR moves, your rate moves with it. Floating-rate loans are standard for transitional CRE strategies including 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 primary advantage of floating-rate debt is flexibility — no prepayment penalties and the ability to repay at any time — but the tradeoff is exposure to interest rate volatility.
How It Works in Practice
Managing floating-rate debt requires active attention to interest rate risk. Every SOFR movement directly affects your debt service, your DSCR, and your 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. This is why most floating-rate CRE lenders require the borrower to purchase an interest rate cap, which provides a ceiling on the benchmark rate. Some borrowers go further and execute an interest rate swap to convert their floating-rate exposure to a synthetic fixed rate. The choice between caps, swaps, and unhedged floating-rate exposure depends on your rate outlook, hold period, and risk tolerance. LoanBoss monitors floating-rate exposure across your portfolio, tracks cap expirations, and models the DSCR impact of rate scenarios so you can see exactly how rate movements affect your entire book.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.