Springing Interest Rate Caps: What CRE Borrowers Should Know
Springing interest rate caps require commercial real estate (CRE) borrowers to purchase an interest rate cap once the floating-rate index on a loan reaches or exceeds a certain value. Typically, the loan documents will specify whether your loan is subject to a springing rate cap. If required, the springing rate cap must be purchased post-closing but only if the specified threshold is met.
Read ahead for 4 things CRE borrowers should know about springing interest rate caps.
The Difference Between Springing Interest Rate Caps and Traditional Caps
Unlike traditional caps, springing caps occur well after closing (if they are triggered). Also, springing caps may not always be triggered as with traditional caps. And if the springing rate cap is not triggered, the borrower does not have to purchase the cap. Conversely, traditional caps are purchased upfront with a single payment at the closing of the loan.
The Cause of The Springing Interest Rate Caps Influx
In June and July 2022, the Feds increased interest rates by 75 basis. Last week, On September 21st, the Fed hiked interest rates by yet another 75 basis points, the biggest back-to-back increases since the early 1980s. As a result, caps are being triggered more often, thus causing an influx of springing caps.
The Benefits of Springing Interest Rate Caps
Commercial real estate borrowers can benefit from springing interest rap caps in several ways:
- Springing rate caps protect borrowers from the effects of rising interest rates by limiting the total interest expense to a predefined maximum level.
- Springing rate caps are a prudent method for borrowers concerned with risk management.
- Springing caps allow borrowers to avoid the cap’s upfront cost at the time of loan closing.
In each of these scenarios, the borrower is protected from the rapidly increasing interest rates if and when their springing caps are sprung.
How Can Thirty Capital Financial Help?
In the midst of rapidly changing interest rates, borrowers may find out that their caps have sprung at the last minute or even after the fact. In some cases, the borrower only has a couple of days to purchase an interest rate cap. Borrowers are likely to become frantic in this urgent situation.
Thirty Capital Financial helps borrowers purchase interest rate caps within an average of 3-5 business days. We help identify cap counterparties, generate cap term sheets, gather and submit KYC (know your customer) information, compile required Dodd-Frank representations and get caps placed quickly. Additionally, we help borrowers set up automated alerts to eliminate surprises as they approach a springing interest rate cap.
Need help getting started with your springing interest rate cap? Speak with one of our experts for a review of your loan portfolio today!