SOFR (Secured Overnight Financing Rate) is the benchmark interest rate that has replaced LIBOR as the reference rate for virtually all new U.S. dollar-denominated floating-rate commercial real estate loans. Published daily by the Federal Reserve Bank of New York, SOFR is based on the cost of overnight borrowing collateralized by U.S. Treasury securities in the repurchase agreement (repo) market — one of the deepest and most liquid markets in the world, with daily transaction volumes typically exceeding $1 trillion. Unlike LIBOR, which was based on bank estimates and was susceptible to manipulation, SOFR is derived from actual transactions and is considered a near-risk-free rate. CRE floating-rate loans are typically priced as SOFR plus a credit spread (e.g., SOFR + 250 basis points), with the SOFR component resetting monthly or quarterly.
How It Works in Practice
SOFR is the rate that determines your interest cost on every floating-rate CRE loan in your portfolio, making it the single most important external variable in your debt management. When the Federal Reserve raises or lowers its target rate, SOFR moves in near-lockstep, directly changing your debt service on every floating-rate loan. Several SOFR variants are used in CRE lending: daily simple SOFR, compounded SOFR (calculated in advance or in arrears), and term SOFR (forward-looking rates for 1, 3, 6, or 12 months published by CME Group). Most CRE loans reference term SOFR because it provides a known rate at the start of each interest period, simplifying cash flow planning. Understanding which SOFR convention your loan uses — and how it’s calculated — matters for accurate debt service forecasting. Many loans also include a SOFR floor (e.g., “SOFR shall not be less than 0.50%”), which sets a minimum benchmark rate regardless of where SOFR actually trades. LoanBoss tracks SOFR conventions, rate reset dates, and floor provisions across your floating-rate portfolio, and The Debt Stack reports SOFR movements weekly.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.