| Detail | Explanation |
|---|---|
| Full name | Secured Overnight Financing Rate |
| Administrator | Federal Reserve Bank of New York |
| Method | Volume-weighted median of overnight Treasury repo transactions |
| First value date | April 2, 2018 |
| Used in CRE for | Bridge, construction, and other floating-rate loans |
How is SOFR calculated?
The New York Fed calculates SOFR as a volume-weighted median of transaction-level repo data. The data set covers tri-party repo trades collected from the Bank of New York Mellon and the Treasury's Office of Financial Research, GCF Repo trades, and bilateral Treasury repo trades cleared through FICC's DVP service. Repos on specific securities that trade below general collateral rates are filtered out.
Because the rate comes from actual overnight borrowing backed by Treasuries, it carries almost no bank credit risk. That is the main difference from LIBOR, the survey-based rate that many US floating-rate commercial loans used before SOFR replaced it.
Which versions of SOFR show up in loan documents?
The overnight rate is the base. The New York Fed also publishes SOFR Averages, which compound SOFR over rolling 30, 90, and 180 calendar day periods, and a SOFR Index that tracks the cumulative effect of compounding from April 2, 2018 forward. Many commercial loans instead reference a forward-looking term rate set at the start of each interest period.
The note and loan agreement define exactly which version applies, how often it resets, any floor on the index, and what replaces it if it stops being published. Those definitions matter more than the name on the term sheet.
- Daily SOFR or compounded SOFR, paid in arrears
- A SOFR Average matched to the payment period
- A forward-looking term rate fixed at the start of each period
- An index floor, which sets a minimum index value no matter where SOFR goes
How does SOFR set the rate on a commercial loan?
A floating-rate loan is priced as index plus spread. The spread is fixed at closing and reflects the lender's view of the property, the business plan, leverage, and the sponsor. The index moves with the market. When SOFR rises, the borrower's interest cost rises by the same amount, and the loan's debt service coverage ratio falls.
This is why many lenders require an interest rate cap on floating-rate bridge loans and construction loans. Current SOFR and Treasury readings are tracked on our commercial real estate loan rates page.
Loan interest rate = SOFR (or the defined SOFR version) + fixed spread
Worked example
In this hypothetical example, a sponsor closes a $20,000,000 floating-rate bridge loan with a 3.25% spread. The figures below assume SOFR of 4.00% for illustration only. They are not a current reading or a quote. To see how a real spread and index would apply to your property, submit the deal.
| Scenario | Assumed SOFR | All-in rate | Annual interest |
|---|---|---|---|
| Base case | 4.00% | 7.25% | $1,450,000 |
| SOFR up 1.00% | 5.00% | 8.25% | $1,650,000 |
| Change | 1.00% | 1.00% | $200,000 |
Sources
Common questions
Who publishes SOFR?
The Federal Reserve Bank of New York publishes SOFR each business day on its website. The first SOFR value date was April 2, 2018.
Is SOFR the same as the interest rate on my commercial loan?
No. SOFR is the index. Your rate is SOFR, or whichever SOFR version the loan documents name, plus a spread the lender sets at closing. A floor in the documents can also keep the index from falling below a set level.
Why did commercial loans switch from LIBOR to SOFR?
LIBOR relied on bank submissions rather than a deep pool of actual transactions. SOFR is built from overnight Treasury repo trades, so it rests on observed market activity. US floating-rate loans moved to SOFR-based indexes as LIBOR was phased out.
Do fixed-rate commercial loans use SOFR?
Most fixed-rate permanent loans are priced off Treasury yields or swap rates at rate lock, not SOFR. SOFR matters most for bridge, construction, and other floating-rate debt, where it resets through the life of the loan.
How do I protect a floating-rate loan against rising SOFR?
The common tools are an interest rate cap, an interest rate swap, or choosing fixed-rate debt. Lenders on transitional loans often require a cap and set its strike and term in the loan agreement.
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