SOFR Commercial Loan Structures, Floating Spreads & Benchmarks
Following the global retirement of LIBOR, the Secured Overnight Financing Rate (SOFR) has become the universal benchmark index for floating-rate commercial real estate financing in the United States. Commercial loans utilize either 1-Month Term SOFR or 30-Day Average SOFR compounded in arrears, combined with a fixed lender margin spread to determine the borrower monthly note rate.
Indicative Underwriting Matrix
SOFR rates fluctuate daily based on U.S. Treasury repo market volume. Verify current forward curve projections with desk underwriters.
1-Month Term SOFR vs. 30-Day Average Compounded SOFR
Commercial lenders structure floating-rate debt using two primary SOFR conventions:
1. 1-Month Term SOFR: Administered by the Chicago Mercantile Exchange (CME), Term SOFR is a forward-looking rate derived from SOFR futures markets. Borrowers know their exact interest rate on the first day of the monthly billing period, making debt service forecasting straightforward.
2. Daily Compounded SOFR: Administered by the Federal Reserve Bank of New York, this backward-looking rate reflects the actual volume-weighted median of overnight Treasury repurchase transactions. Interest accumulates daily, with final monthly payment calculated at the end of the billing cycle.
The Mechanics of Lender Margin Spreads and Index Floors
A floating-rate commercial note specifies: "Interest shall accrue at a rate per annum equal to 1-Month Term SOFR plus the Margin Spread (e.g., 3.75%), subject to an Index Floor of 1.00%."
If 1-Month Term SOFR is 4.50%, the borrower coupon is 8.25% (4.50% + 3.75%). If SOFR drops to 0.50%, the index floor activates, keeping the index at 1.00% and preventing the total interest coupon from dropping below 4.75% (1.00% + 3.75%).
Frequently Answered Financing Questions
Verified answers to common borrower and broker inquiries regarding loan sizing, guidelines, and execution.
What is the difference between Term SOFR and Daily Simple SOFR in commercial loans?
Term SOFR is a forward-looking rate set at the beginning of the monthly billing period, while Daily Simple SOFR calculates interest based on overnight repo trades throughout the month.
Most commercial borrowers and banks prefer 1-Month Term SOFR because it provides payment certainty at the start of each monthly billing cycle.
Submit Financing Scenario →Do commercial floating-rate SOFR loans require interest rate caps?
Yes. Institutional debt funds, banks, and CMBS lenders mandate that floating-rate borrowers purchase an interest rate cap agreement to limit maximum debt service during rate spikes.
The interest rate cap establishes an absolute ceiling on the SOFR index, protecting property cash flow and preserving required debt service coverage ratios.
Submit Financing Scenario →