What 2022's rate spike did to floating-rate deals

January 3, 2022: SOFR was 0.05%.

December 30, 2022: SOFR was 4.30%.

That 425-basis-point move did not wait for renovations, lease-up, or anyone’s quarterly update. It arrived in the next interest calculation.

The rate observations come from the New York Fed’s official SOFR data. Everything about the property, borrower, cap, loan, and investor outcome below is hypothetical. This is education, not investment, legal, tax, accounting, or derivatives advice, and it is not an offering or rate forecast.

In this invented case, the operator opens the December lender statement and calls the asset manager.

“The property is ahead of last year’s NOI.”

“The loan is further ahead.”

That is the scene 2022 wrote for floating-rate deals: operations could improve while debt took the cash faster.

The same loan enters December

Take a fictional apartment deal with a $15 million interest-only bridge loan priced at daily SOFR plus a 2.75% spread. To isolate the lesson, assume the two published SOFR observations were the applicable index snapshots and ignore day-count and reset timing.

At 0.05% SOFR, the all-in rate is 2.80%. Annualized interest is $420,000: $15 million x 2.80%.

At 4.30% SOFR, the all-in rate is 7.05%. Annualized interest is $1,057,500. Same principal. Same spread. An extra $637,500 a year headed toward debt service.

If property NOI is $1.2 million, interest-only DSCR falls from 2.86x to 1.13x. Nothing at the property needed to break. The debt-service line moved on its own schedule.

Actual payments would depend on the executed index definition, lookback, reset dates, floor, actual/360 convention, and changing principal. Nobody puts that sentence in large type. The lender still calculates from it.

The cap does exactly what it promised

Assume the borrower bought a cap with a 3.00% SOFR strike on the full $15 million notional. At 4.30% SOFR, the simplified annualized cap offset is 1.30% x $15 million, or $195,000. Net interest economics land near $862,500, equivalent to the 3.00% capped index plus the 2.75% loan spread.

The cap worked. Annualized interest was still $442,500 above the opening snapshot, and DSCR was only 1.39x.

“I thought we had a 3% cap.”

You had a 3.00% strike on SOFR in this hypothetical. The loan spread kept its full appetite.

That is the first 2022 lesson: a 3% cap was not a 3% mortgage. The strike applied to the index. The spread kept eating. A floor, uncovered notional, mismatched index, late payment, or expired cap could make the result worse.

Fannie Mae’s current interest-rate cap guidance defines the cap as a separate agreement, requires replacement when coverage ends before certain loan maturities, and, for its applicable SARM program, requires a reserve of at least 110% of current replacement cost. Those are program-specific rules, not universal loan terms. They show the questions a serious file should answer.

The refinance call changes the meeting

Suppose NOI eventually grows from $1.2 million to $1.35 million. Operations improved 12.5%. The original model expected a refinance at 5.25%, 30-year amortization, and 1.25x DSCR.

At 1.25x DSCR, $1.35 million of NOI supports $1.08 million of annual debt service. At 5.25%, the 30-year mortgage constant is about 6.63%, supporting roughly $16.30 million of proceeds. At 7.25%, the constant is about 8.19%, supporting only $13.19 million.

Against the $15 million balance, the higher-rate refinance needs about $1.81 million of paydown before lender fees, escrows, or fresh capital reserves.

The operator asks the lender to repeat the proceeds. The number stays $13.19 million.

The refinance has stopped being an exit and become a funding gap. NOI went up. Refinance proceeds went down. Both can be true.

Fannie Mae’s Refinance Risk Analysis connects projected cash flow, required DSCR, loan balance, value, and a stressed refinance rate. The OCC’s current Commercial Real Estate Lending handbook likewise treats variable-rate exposure and stress analysis as underwriting concerns.

The debt file already knows the dates

Pull exact documents, not a summary slide:

• the promissory note, loan agreement, every amendment, and monthly lender statements;
• the defined index, spread, floor, reset date, lookback, day-count convention, default rate, and interest-only end date;
• the cap confirmation and agreement, notional schedule, strike, effective and termination dates, payment mechanics, provider, assignment, and counterparty acknowledgement;
• the cap invoice, current replacement quotes, reserve agreement, reserve statements, and lender notices;
• maturity and extension clauses, fees, DSCR and debt-yield tests, required paydown, cash sweep, and recourse provisions;
• the current rent roll, T-12, T-3, general ledger, bank statements, capital-draw log, unit downtime, and accounts payable; and
• refinance term sheets, appraisal, broker opinions, payoff statement, and a sources-and-uses schedule for any shortfall.

If investors own LLC or partnership interests, compare the PPM, operating agreement, subscription agreement, capital-call provisions, and investor reports with that debt file. The SEC’s private-placement bulletin explains that private offerings can provide limited disclosure and that offering documents generally are not reviewed by a regulator. A Form D is a notice, not a hall pass.

A 3% strike borrows the word rate

The clean trick was a slide labeled “3% rate cap” beside projected debt service calculated at 3%. That quietly deleted the loan spread. Sometimes the same slide treated the forward curve as a promise and cap renewal as last year’s invoice.

The failure mode underneath it was calendar blindness. A cap could expire before maturity; an extension could require replacement coverage; the replacement quote and extension fee could arrive while cash was already trapped. The business plan had three clocks, and the pitch showed one.

Questions before the calendar collects

• What is debt service today, at the strike, uncapped, and after amortization begins?
• When does the cap expire relative to maturity and each extension deadline?
• Who controls cap payments, and can the lender trap them?
• What is the current replacement quote, from whom, and how much cash is reserved?
• Does current NOI satisfy every extension test?
• What refinance proceeds result from today’s rate, amortization, DSCR, and value?
• Who can fund a $1.81 million gap, and what happens if nobody does?
• Does the governing agreement permit a capital call, dilution, sale, or loan modification?

Give every clock a column

Your next move is a 13-column monthly schedule starting now. Show index reset, gross interest, expected cap receipt, net debt service, NOI, unrestricted cash, cap reserve, covenant status, extension deadline, and maturity. Put the controlling document and section beside every input.

Then replace the model’s refinance rate with a current written lender quote.

The transferable rule is to underwrite floating debt as three synchronized clocks: index resets, cap coverage, and loan maturity. Put all three beside monthly cash. If the plan survives only because one clock is missing from the page, the plan does not survive.