What is SOFR and Why Do I Care?

As real estate investors we are very sensitive to interest rates.

Rates for permanent loans are indexed to the yield on the 10 year treasury and in some cases on the yield for the 30 year treasury.

But for short term financing like bridge financing or construction loans, these loans are indexed historically to LIBOR. It’s common to see a construction loan with a rate of LIBOR + 5.75% with a floor of, say, 8.5%. So what is this thing called LIBOR and why is it used to set rates for commercial bridge loans?

For more than 40 years, the London Interbank Offered Rate—commonly known as Libor—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt.

The important aspect of SOFR is that theoretically, it will be more difficult to manipulate because unlike the LIBOR, there’s extensive trading in the Treasury repo market. SOFR is based on data from observable transactions rather than on estimated borrowing rates, as is sometimes the case with LIBOR. That makes SOFR much more difficult to manipulate.

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Host: Victor Menasce

email: podcast@victorjm.com