SOFR (the Secured Overnight Financing Rate) is the benchmark interest rate that replaced LIBOR as the reference rate for virtually all new U.S. dollar floating-rate commercial real estate loans. Published daily by the Federal Reserve Bank of New York, it measures the cost of overnight borrowing collateralized by U.S. Treasury securities in the repurchase agreement (repo) market.
How is SOFR calculated and published?
The repo market is one of the deepest and most liquid markets in the world, with daily transaction volumes typically exceeding $1 trillion. SOFR is derived from those actual transactions, which is the main difference from LIBOR: LIBOR was based on bank estimates and was susceptible to manipulation. Because the borrowing is secured by Treasuries, SOFR is considered a near-risk-free rate.
When the Federal Reserve raises or lowers its target rate, SOFR moves in near-lockstep, which directly changes the debt service on every floating-rate loan that references it.
How does SOFR set the rate on a CRE loan?
A floating-rate CRE loan is priced as SOFR plus a credit spread, for example SOFR + 250 basis points, with the SOFR component resetting monthly or quarterly. Many loans also include a SOFR floor (“SOFR shall not be less than 0.50%”), which sets a minimum benchmark rate regardless of where SOFR actually trades.
All-in rate = SOFR for the period (or the floor, if SOFR is below it) + credit spread
Illustrative example (round numbers):
| Input | Value |
|---|---|
| Loan balance | $10,000,000 |
| Credit spread | 250 basis points (2.50%) |
| SOFR floor | 0.50% |
| SOFR this period | 4.00% |
| All-in rate this period | 6.50% |
| Annualized interest at that rate | $650,000 |
| All-in rate if SOFR fell to 0.25% | 3.00% (the 0.50% floor applies) |
Which SOFR conventions do loans use?
Several SOFR variants are used in CRE lending: daily simple SOFR, compounded SOFR (calculated in advance or in arrears), and term SOFR, the 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, which simplifies cash flow planning.
Which convention a loan uses, and how the rate is calculated, determines the accuracy of any debt service forecast. SOFR is the rate that sets the interest cost on every floating-rate loan in a portfolio, which makes it the single most important external variable in debt management. Borrowers who want a ceiling on that variable buy an interest rate cap.
How SOFR shows up in LoanBoss
LoanBoss models every index, payment convention, and business day adjustment in the loan documents, and re-amortizes agency floaters each month based on the floating reset for that period. SOFR conventions, rate reset dates, and floor provisions are tracked across the floating-rate portfolio with live rates, and The Debt Stack reports SOFR movements weekly.
Frequently Asked Questions
What replaced LIBOR for CRE loans?
SOFR. Virtually all new U.S. dollar floating-rate commercial real estate loans now reference SOFR plus a credit spread, with the SOFR component resetting monthly or quarterly.
Who publishes SOFR?
The Federal Reserve Bank of New York publishes SOFR daily. Term SOFR, the forward-looking rates for 1, 3, 6, or 12 months, is published by CME Group.
Why is SOFR considered near-risk-free?
It is derived from actual overnight borrowing collateralized by U.S. Treasury securities in the repo market, so the lender in each transaction holds Treasuries as security. LIBOR, by contrast, was based on bank estimates and was susceptible to manipulation.
What is the difference between term SOFR and compounded SOFR?
Term SOFR is a forward-looking rate known at the start of the interest period. Compounded SOFR is built from daily rates and is calculated either in advance or in arrears. Most CRE loans reference term SOFR because the rate is known when the period begins.
What is a SOFR floor?
A minimum benchmark rate written into the loan, such as “SOFR shall not be less than 0.50%”. If SOFR trades below the floor, the loan’s rate is calculated using the floor instead of the actual index.
Related Terms
- Floating Rate
- Basis Point
- Interest Rate Cap
- Interest Rate Swap
- Floating-Rate Loan Re-Amortization and SOFR Index Tracking for Borrowers
- Loan Portfolio Dashboards with Real-Time Rates: What a CRE Owner Should See Every Morning
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary