Short answer: Fixed-rate commercial real estate debt gives you a known interest rate for the contract’s fixed period, while floating-rate debt resets with a specified benchmark—often a SOFR measure—plus the lender’s margin. A floating loan with an interest-rate cap limits the benchmark’s upside above the cap strike, but it does not become a fixed loan and does not remove every payment, refinancing, or exit risk. Choose by comparing the complete term sheets, projected debt service, cap and reserve costs, prepayment rules, and your property’s ability to withstand higher rates—not by comparing the initial coupons alone.
What the two loan structures actually do
Fixed-rate debt
A fixed-rate loan holds its stated interest rate constant during the agreed fixed period. Your scheduled interest expense is therefore easier to forecast, which can help with budgets, distributions, and debt-service-coverage planning.
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“Fixed” describes the rate only for the period specified in the documents. A loan can have a fixed coupon until maturity, or it can have a shorter fixed period followed by an adjustment, extension pricing, or a balloon payoff. Confirm the exact fixed period, maturity date, extension options, and rate that applies after any extension.
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Early repayment can be expensive. Many fixed-rate commercial real estate loans use defeasance, yield maintenance, a lockout, or another prepayment formula. Chatham Financial notes that a common formula is driven by the difference between the loan coupon and a market-based rate—often Treasuries—for the remaining term. That is a feature to investigate, not a rule that applies to every fixed loan. Ask for a written payoff calculation at several possible sale dates.
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Floating-rate debt
A floating-rate loan resets according to the benchmark and timing written into the loan agreement. The contract should identify the benchmark variant, observation convention, reset interval, lender margin, floor, any periodic or lifetime cap, and what happens if the benchmark is discontinued or changed.
A common structure is a SOFR measure plus a fixed lender spread. Fannie Mae’s multifamily Structured Adjustable-Rate Mortgage (SARM), for example, describes adjustments based on 30-day Average SOFR. That product description should not be generalized to every commercial loan: another lender may use a different SOFR convention, reset date, lookback, or fallback rate.
The interest rate is only one part of the payment. Principal balance, amortization schedule, interest-only period, day-count convention, and any fees also affect the amount due. A lower starting floating coupon can still produce a higher total cost over your ownership period if the benchmark rises.
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| Feature | Fixed-rate loan | Floating-rate loan |
|---|---|---|
| Rate setting | Contracted coupon stays constant during the stated fixed period. | Specified benchmark plus lender margin, subject to the contract’s floor and caps. |
| Payment predictability | High during the fixed period, assuming scheduled principal and fees are known. | Changes when the benchmark resets; principal amortization and interest-only terms also matter. |
| Upside if rates fall | Usually none without refinancing or exercising a permitted repricing option. | Interest expense can decline when the benchmark declines, subject to any floor. |
| Risk if rates rise | Limited during the fixed period, but refinancing or an adjustable extension can create later exposure. | Borrower bears the increase unless a hedge or cap offsets the relevant exposure. |
| Early-exit economics | May include defeasance, yield maintenance, lockout, or another prepayment charge. | May be more flexible, but a cap, swap, or other hedge can have its own termination cost and conditions. |
| Key documents to review | Note, mortgage, prepayment schedule, extension language, and any rate-reset provision. | All of the loan documents plus benchmark definitions, hedge or cap confirmation, collateral assignment, and replacement requirements. |
How a SOFR loan with an interest-rate cap works
1. The loan rate is calculated
Most floating structures can be represented as:
Loan rate = applicable benchmark (subject to any floor) + lender margin
The benchmark might be a daily or averaged SOFR measure. The agreement determines which observation is used and when it is locked for the next interest period. A floor means the benchmark cannot be treated as below a stated minimum even if the published rate is lower.
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2. The cap limits a defined index exposure
A rate cap is a hedge with a strike (the cap rate), notional amount, benchmark, term, and settlement rules. If the specified benchmark rises above the strike, the cap provider generally owes an amount based on the excess for the covered notional and period. The exact payment mechanics, day-count fraction, payment date, and treatment of partial periods are contractual.
A cap usually protects the benchmark component only. If the strike is 5.5% and the lender margin is 2.5%, the loan’s all-in rate can still reach approximately 8.0% before considering floors, amortization, fees, or any mismatch between the cap and loan calculations. The cap does not make the loan fixed below 5.5%, and it does not protect against a higher lender margin, principal changes, fees, or a benchmark that the cap does not cover.
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3. The cap may not cover the whole loan term
Compare the cap expiration date with the loan maturity and every extension option. When the mortgage term is longer than the interest-rate-cap term, Fannie Mae’s SARM product page states that the borrower must fund a cash reserve at closing equal to at least 110% of the current replacement-cap cost for the next cap. That is a condition of the specified SARM product, not a universal commercial real estate requirement. Other lenders may require a different reserve, a replacement cap by a deadline, or no replacement at all.
Ask who buys the cap, who receives the hedge payments, how the cap is assigned to the lender, what happens if the cap provider’s credit rating changes, and what happens at expiration. The loan agreement and hedge confirmation must be read together.
Illustrative cap calculation
The following numbers are an example, not a quote. Assume a $10 million interest-only loan, a 2.5% margin, annual benchmark resets, and a cap that covers a 5.5% benchmark strike for the full notional. Ignoring day-count details and fees:
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| Benchmark used for the period | Uncapped all-in rate | Approximate capped all-in rate | Annual interest before cap settlements |
|---|---|---|---|
| 3.0% | 5.5% | 5.5% | $550,000 |
| 5.0% | 7.5% | 7.5% | $750,000 |
| 7.0% | 9.5% | 8.0% | $800,000 |
| 9.0% | 11.5% | 8.0% | $800,000 |
In the 7% and 9% cases, the cap is assumed to pay the excess over the 5.5% benchmark strike on the covered notional. Actual cash flows can differ because of reset timing, the cap’s day-count convention, amortization, a partial notional schedule, the cap premium, and any mismatch between the cap and loan benchmark.
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Rate and cash-flow risk
Fixed debt shifts short-term benchmark risk away from the borrower during the fixed period. Floating debt leaves more of that risk with the borrower, but gives the borrower the benefit if the benchmark falls. A cap converts an unlimited benchmark increase above its strike into a defined hedge cost and contractual exposure; it is not free insurance.
Prepayment and exit risk
A property may be sold, refinanced, recapitalized, or transferred before maturity. Fixed-rate prepayment provisions can make an otherwise attractive sale uneconomic. Floating debt can be easier to repay, but a cap or swap may have a termination value, assignment restriction, or lender consent requirement. Request payoff statements for the dates that match your business plan rather than relying on a general description such as “flexible prepayment.”
Refinancing and maturity risk
A fixed coupon protects you only until the loan’s next repricing or maturity. A floating loan can be affordable today but produce a large maturity balance if it is interest-only or lightly amortizing. Both structures can expose you to refinancing risk if property value, rent, occupancy, or credit conditions deteriorate. Model the maturity payment and the debt-service level a replacement lender would require.
Hedge and reserve costs
Include the upfront cap premium, lender review fees, legal costs, reserve funding, replacement-cap cost, and any breakage or termination amount in the financing comparison. A cap with a low strike generally costs more than one with a high strike, while a longer term and larger notional generally increase the premium. The documents determine the actual price and obligations.
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How to compare two actual proposals
Use written proposals for the same property, loan amount, closing date, and underwriting assumptions. Then work through the following sequence.
- Normalize the rate definitions. Record the fixed coupon or, for floating debt, the exact benchmark, margin, floor, reset frequency, lookback or observation convention, and fallback language. “SOFR” by itself is not a complete rate definition.
- Rebuild the payment schedule. Calculate interest from the projected principal balance, amortization, and interest-only period. Include the actual day-count convention and payment dates when the lender provides them.
- Model several benchmark paths. At minimum, test the lender’s base case, a materially higher benchmark, a lower benchmark, and a prolonged high-rate period. For floating debt, apply the floor and cap exactly as written; for fixed debt, test the rate and payment that apply after maturity or an extension.
- Add every hedge cost. Include the cap premium, reserve funding, replacement-cap assumptions, and any hedge settlement or collateral requirements. Do not treat the cap strike as the all-in loan rate.
- Analyze the hold and exit dates. Compare scheduled debt service, outstanding principal, prepayment charges, defeasance or yield-maintenance calculations, cap expiration, and the cost of selling or refinancing in each likely year.
- Check extension conditions. Identify extension fees, notice deadlines, minimum debt-service coverage, loan-to-value tests, updated valuations, replacement-cap requirements, and any cash-management or leasing conditions.
- Test property resilience and borrower liquidity. Measure debt-service coverage under lower occupancy, slower rent growth, higher expenses, and higher rates. Keep enough liquidity for operating shortfalls, reserves, and a cap renewal rather than relying on optimistic distributions.
- Review recourse and guarantees. Compare completion, carry, environmental, bad-boy, springing-recourse, and payment guarantees. A lower rate can be a poor trade if it requires materially greater personal or corporate exposure.
- Have the documents reviewed together. Counsel, the lender, and the hedge provider should reconcile the loan rate definition, cap confirmation, collateral assignment, reserve language, and remedies. A term-sheet summary cannot resolve conflicts in the definitive documents.
Comparison worksheet
| Item | Fixed proposal | Floating proposal | Why it changes the decision |
|---|---|---|---|
| Initial and all-in rate | Coupon and fixed-period dates | Benchmark, margin, floor, and reset rules | Shows the real starting payment and how it can change. |
| Loan term and amortization | Term, amortization, interest-only period, balloon | Term, amortization, interest-only period, balloon | Determines maturity exposure and principal reduction. |
| Cap or other hedge | Not applicable unless the loan later adjusts | Strike, notional, benchmark, term, premium, reserve, replacement | Quantifies protection and obligations above the strike. |
| Prepayment | Defeasance, yield maintenance, lockout, or other formula | Open periods, notice rules, and hedge termination costs | Determines whether you can sell or refinance economically. |
| Extensions | Fee, rate, tests, and repricing | Fee, rate, tests, cap replacement, and repricing | Can create a new rate and new cash requirement. |
| Credit requirements | DSCR, LTV, liquidity, guarantees, recourse | DSCR, LTV, liquidity, guarantees, recourse | Shows whether the structure remains workable in a downturn. |
| Total expected cost | Interest, fees, reserves, and exit costs | Interest under scenarios, cap and reserve costs, fees, and exit costs | Prevents a low teaser rate from deciding the comparison. |
When each structure may fit
Fixed rate may fit a stable, long-hold property
Fixed debt can suit a property with predictable rents and expenses, a borrower with limited capacity for higher debt service, and an ownership plan that broadly matches the fixed term. It can also simplify budgeting when the cost of a rate cap is high or renewal funding would be difficult.
Check that the certainty is worth the loss of flexibility. A long lockout or expensive yield-maintenance formula may conflict with a strategy that includes selling after lease-up, refinancing after improvements, or accepting an unsolicited offer.
Floating rate may fit a shorter or actively managed hold
Floating debt can fit a value-add project expected to refinance or sell before a long fixed period would be useful, particularly when the proposal provides reasonable prepayment flexibility. The borrower must have liquidity and operating cash flow that can withstand a higher benchmark, and the planned exit must be realistic under stressed valuation and debt-service assumptions.
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A cap can place an upper boundary on a defined benchmark exposure while preserving the possibility of lower payments if the benchmark falls. The trade-off is the premium, the strike level, the cap term, the reserve or replacement obligation, and the possibility that the cap and loan do not calculate interest identically.
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Do not choose solely on a rate forecast
A view that rates will fall can be wrong, arrive after the property’s exit, or be outweighed by a cap premium and refinancing costs. A view that rates will rise can also be wrong. Use a rate forecast as one scenario, not as the decision rule.
What lender underwriting guidance does—and does not—tell you
Federal Reserve interagency guidance describes useful ways for lenders to stratify commercial real estate exposure, including loan structure (fixed or adjustable), purpose (such as construction, short-term, or permanent), loan-to-value limits, and debt-service coverage. It also discusses borrower net worth, property cash flow, and debt-service coverage in lender policies.
This is supervisory guidance for institutions, not a borrower qualification checklist that every lender applies identically. Your lender may use different thresholds, reserves, recourse requirements, and stress assumptions. Ask for the actual underwriting conditions in your proposal.
Dated market figures: useful context, not a quote
A 2026 New York Life Investments report states that the average fixed-rate commercial mortgage was 5.9% as of December 2025 and cites floating SOFR at 3.7% in its December 2025 context. Those figures are historical report data, not October 2026 borrower quotes or predictions.
The excerpt does not establish that the two figures share the same borrower, property type, leverage, tenor, lender margin, cap, fees, or amortization. They therefore cannot be used as an apples-to-apples comparison or as a forecast for your term sheet. Obtain current written pricing for your property and preserve the assumptions beside each rate.
Common mistakes and how to correct them
| Mistake | What goes wrong | Correction |
|---|---|---|
| Comparing only the opening coupon | The floating rate may reset higher, while fixed debt may carry substantial exit charges. | Compare total expected cost over the actual hold period and a downside case. |
| Treating a cap as a fixed rate | The cap limits a specified index above a strike but does not fix the rate below it or cover every loan cost. | Calculate the maximum covered benchmark plus the margin, then check exclusions and mismatch risk. |
| Ignoring the benchmark definition | Two loans both labeled “SOFR” may use different averages, lookbacks, reset dates, or fallback provisions. | Copy the precise benchmark language into your model and have counsel explain it. |
| Forgetting the floor | The borrower may not receive the full benefit of a falling benchmark. | Apply the contractual floor before adding the margin. |
| Overlooking cap expiration | A replacement cap can be expensive or require a large reserve at an inconvenient time. | Calendar the expiration, price renewal under stressed conditions, and identify the required reserve. |
| Assuming interest-only debt is cheaper | Lower scheduled payments can leave a large maturity balance and refinancing risk. | Model principal outstanding, balloon repayment, and replacement-loan DSCR. |
| Ignoring extension tests | An extension may require a new cap, higher rate, fee, valuation, or minimum coverage ratio. | List every test and deadline before treating the extension as part of the business plan. |
| Using market averages as offers | Published averages omit property, leverage, credit, tenor, and fee differences. | Use current term sheets for the same assumptions and document their date. |
| Reading the loan and hedge separately | Different definitions, notional schedules, or payment dates can leave an uncovered exposure. | Review the note, cap confirmation, assignment, and remedies as one package. |
A practical decision rule
Start with the property’s downside cash flow, not the rate you hope to obtain. If a materially higher benchmark would breach coverage, force distributions to stop, or require unplanned capital, a fixed period or a conservatively struck cap may be worth its cost. If the property can absorb higher debt service and the exit is likely before a long fixed term ends, floating debt may provide useful flexibility—provided the cap, reserve, and maturity plan are affordable.
Then compare the proposals on identical assumptions. Include debt service, amortization, cap premium and renewal, reserve funding, extension terms, prepayment or hedge termination costs, guarantees, and the cost of refinancing the remaining balance. The appropriate structure is the one that remains workable across plausible rate and operating scenarios while preserving an exit you can actually execute.
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