SOFR (Secured Overnight Financing Rate)
SOFR is the benchmark rate that replaced LIBOR for U.S. dollar lending, fully phased out by mid-2023. It reflects the overnight cost of borrowing cash secured by Treasury repurchase agreements. Floating-rate commercial mortgages typically price as SOFR plus a spread — for example, SOFR + 300 basis points — so the payment resets whenever the index moves.
Two conventions matter in practice: term SOFR, a forward-looking rate set for a 1, 3, or 6-month period and most common on CRE loans, and daily simple SOFR, compounded in arrears and more typical on syndicated credit facilities. Most bridge and construction loans reference 1-month term SOFR with a floor.
Because SOFR floats, floating-rate loans commonly require the borrower to buy a rate cap — a hedge limiting how high the effective rate can climb — as a closing condition. Fixed-rate permanent loans instead price off Treasury yields or swap rates, sidestepping SOFR movement entirely.
At SOFR of 5.3% plus a 300 basis point spread, a floating-rate loan carries an all-in rate of roughly 8.3% until the next reset.