Rising Interest Rates Push Rate Cap Protection Cost Significantly Higher

Although lenders often agreed to loan extensions during the height of the COVID-19 pandemic, commercial property owners with floating-rate debt are now faced with more limited options as interest rate caps are set to expire. A protection typically required by lenders for deals involving floating-rate borrowing was a “fairly modest monetary part of the CRE financing process” when interest rates were near zero. However, the current federal funds rate of between 4.5 percent to 4.75 percent following the eight consecutive rate hikes by the Fed over the past year have “caused a two-year cap on a $25 million loan at a 4 percent strike rate to rise to $569,000 today compared with $97,000 a year ago.” While possible options exist, they are pricy — “purchasing a new cap, paying down the loan, or refinancing with elevated borrowing costs.”

Source:    https://commercialobserver.com/2023/03/rising-interest-rate-cap-costs-pressure-cre-borrowers/