Choosing fixed-rate or floating-rate multifamily debt

The choice between fixed and floating debt is a choice about which risks the owner retains. Fixed debt can make the contractual interest rate predictable while leaving refinancing, operating, and early-exit risks. Floating debt can preserve useful repayment options while requiring the property and sponsor to absorb rate changes or pay for protection. Neither structure is universally safer for every multifamily business plan.

Begin with three facts: how much property cash flow can move, how soon the owner may repay, and how much cash remains available after closing. A loan that works only if rates fall is a speculative financing plan. A fixed loan that is costly to repay can also undermine a strategy built around a near-term sale.

Specify the floating rate precisely

SOFR itself is an overnight rate based on Treasury repurchase agreement transactions; the New York Fed explains its methodology.^[1] A loan labeled “SOFR” may use a compounded average, a forward-looking term rate, or another convention specified in its documents. The ARRC's business-loan conventions distinguish SOFR Averages from Term SOFR and explain that its recommendations are voluntary.^[2]

This matters for budgeting and hedging. Identify the reference rate, observation period, reset date, lookback, floor, spread, and day count. Ask for the actual interest calculation on a sample month. An owner who understands those fields can reconcile the servicer's bill and identify whether the hedge references the same exposure.

Freddie Mac's April 2026 floating-rate product sheet uses 30-day Average SOFR and Actual/360.^[3] Fannie Mae's current Structured ARM sheet also references 30-day Average SOFR but has its own product requirements.^[4] These descriptions are examples of specific executions, not permission to assume every commercial floating loan uses the same benchmark or calculation.

A fixed note simplifies the rate input, but cash debt service can still change if an interest-only period ends or amortization begins. Check the payment schedule separately from the rate description. Also identify any contractual step-up or other provision before describing the payment as fixed for the entire term.

Separate operating resilience from a rate forecast

Build the operating forecast without assuming a favorable refinancing or interest-rate move. Model rents, collections, vacancy, concessions, taxes, insurance, payroll, repairs, and necessary capital spending. Then apply each financing structure to that same operating forecast.

For a hypothetical $72 million interest-only loan, assume current annual NOI of $6.6 million. Option F carries an invented 6.4% fixed rate. Its simplified annual interest is $4.608 million, leaving $1.992 million before capital spending and other uses. Option V carries an assumed 2.5% margin over a benchmark initially at 3.5%, producing a 6% coupon and $4.32 million of simplified annual interest. Initial residual cash is $2.28 million, or $288,000 more than under F.

If V's benchmark rises to 5.5%, the coupon becomes 8% and annual interest reaches $5.76 million. Residual cash falls to $840,000. Now suppose property NOI also falls 10%, to $5.94 million. Residual cash under F becomes $1.332 million; under unhedged V it becomes $180,000. A $700,000 annual capital requirement would leave F with $632,000 while creating a $520,000 shortfall under V.

All rates are invented scenario inputs. These calculations use simple annual accrual and ignore day-count effects, amortization, fees, and taxes. Their decision value comes from combining an operating shock with a financing shock. Showing only the savings in the first year would miss the year in which liquidity becomes decisive.

Understand what the hedge protects

A purchased cap can limit exposure to its specified benchmark above a strike for its notional amount and covered periods. It does not automatically cap the entire contractual coupon or pay repairs, taxes, fees, and operating losses. Compare the confirmation's benchmark, dates, notional schedule, and payment rules with the mortgage. A difference between them creates exposure that a single assumed “capped rate” may conceal.

Fannie Mae's Structured ARM term sheet requires a third-party cap from an approved provider and specifies applicable replacement arrangements.^[4] Freddie Mac's floating-rate sheet describes different cap options.^[3] Obtain the actual terms and premium rather than assigning a cap cost from a prior transaction. A requirement to replace protection later also creates a future funding need.

Return to the $72 million example. Assume a perfectly aligned cap with a 4.5% benchmark strike covers the full balance for the full modeled year. At the 5.5% benchmark, the simplified annual cap payment is $720,000: one percentage point times $72 million. V's net interest after that payment is $5.04 million, corresponding to the assumed 4.5% strike plus 2.5% spread. Under stressed NOI of $5.94 million, $900,000 remains before the $700,000 capital requirement. Residual cash is $200,000 before the cap premium and every omitted cost.

That result is conditional on perfect alignment and performance by the counterparty. It does not establish actual cap settlement timing or pricing. If protection expires before a delayed sale, the owner faces an uncovered period or a replacement purchase. Put the premium, replacement reserve, and expiry date in the cash schedule rather than placing the word “hedged” next to the loan and stopping there.

A swap changes the contract set

A swap generally exchanges specified fixed and floating payments under a separate derivative agreement. Combined with a matched floating mortgage, it can create a more predictable net rate for the hedged portion. The mortgage remains a floating-rate obligation, however, and the hedge's documentation has its own default, termination, and collateral provisions.

Chatham Financial's commercial real estate training highlights loan-floor mismatches, swap termination payments, and loan-linked termination events.^[5] These are issues to review with the actual agreements, not universal outcomes. Obtain a description of what occurs on sale, partial repayment, lender transfer, loan extension, and default. Check which entities and guarantors have obligations under each document.

Do not compare a swapped coupon with a fixed-note coupon while omitting a potential derivative payoff. Nor should the owner assume an early-termination payment is always a loss; the outcome depends on the contract and market valuation. Request scenario estimates, their assumptions, and the conditions under which the mortgage and hedge can end at different times.

Evaluate exit flexibility in dollars

Fixed and floating products can have very different repayment mechanics. Freddie Mac's fixed-rate sheet describes yield maintenance and defeasance pathways; its floating sheet offers several lockout and percentage-premium schedules.^[6][3] Product menus do not determine the actual selected provision. Review the proposed loan's terms at the intended repayment date.

For an owner who expects to sell after completing renovations, compare repayment in the expected year and after a delay. Price the combination of loan premium, hedge termination or remaining hedge value, transaction fees, and outstanding principal. A rate saving of $288,000 per year in the example is meaningful but can be overwhelmed by an exit obligation. Conversely, paying a somewhat higher recurring rate may be rational if the selected repayment rights support the business plan.

The eventual refinancing rate matters for both structures. A fixed coupon expiring at maturity does not fix the next loan's rate or guarantee proceeds. Floating debt with a cap also does not guarantee an extension. Preserve a separate maturity stress that considers lower income, higher financing cost, and a smaller takeout loan.

Make the decision before guessing the market

Approve a rate-risk budget: the annual debt-service increase the property can absorb, the cash the sponsor can contribute, and the periods requiring hedge coverage. Then compare the cost of buying protection with the operating cushion it preserves and the exit rights the strategy needs.

The decision record should show expected cash, stressed cash, initial and replacement hedge expenses, repayment scenarios, and unhedged exposures. Choose the rate structure that remains fundable through a plausible operating setback and an altered exit date. A macroeconomic view can inform the choice, but it should not substitute for a financing plan that survives being wrong.