The End of LIBOR: Keeping Your Best Interest in Mind
The London Interbank Offered Rate (LIBOR), which is the basis for the interest rates for millions of commercial real estate loans, is scheduled to be phased out by the end of 2021 according to the United Kingdom’s Financial Conduct Authority (FCA). The Secured Overnight Financing Rate (SOFR), which represents the cost of borrowing cash overnight collateralized by Treasury securities, is the likely successor to LIBOR in the U.S., but it is not yet a mandatory replacement. While many loan documents address the possibility of LIBOR’s unavailability, most loan documents fall into three categories. First, there may be language that converts the LIBOR component to the last LIBOR rate quoted, which would essentially convert a variable payment into a fixed payment. Second, some loan documents contemplate a more specific alternative (e.g., prime rate, SOFR, etc.) that could be a higher or more volatile rate than LIBOR, resulting in a potentially unplanned increase in borrowing costs. Finally, some contracts do not contain any alternative to LIBOR, which could lead to potential conflict, and even litigation, if the borrower and its lender fail to agree on an alternative rate prior to LIBOR’s unavailability. Borrowers and their counsel should review their existing loan documents that mature after 2021 to understand and plan for how their loan payments will be...