How does a sponsor choose between fixed and floating rate on a CRE loan with current spreads?

Compare rate structures over your expected hold

Decision factor 1: hold horizon. Bridge or value-add deals with 24-to-36-month hold typically choose floating-with-cap because the rate exposure window is short and the cap converts the unknown to a defined worst case. Long-hold core or core-plus deals (7-to-10 year hold) typically choose fixed because the rate exposure compounds over a long period.

Decision factor 2: cash-flow sensitivity. A cash-flow-stressed deal where 50 bps of additional debt service kills distributions belongs in fixed regardless of curve shape. A well-cushioned deal with 1.50x DSCR cushion can absorb floating-rate volatility without distribution risk and benefits from the typically lower floating rate at origination.

Decision factor 3: curve shape. Compare today's fixed rate (10-year fixed perm) against the borrower's projected average floating rate (today's spot SOFR plus the forward-curve average over the hold period, plus loan spread, plus cap premium amortized). When the projected average floating rate is materially below fixed, floating-with-cap wins on expected cost; when the projected average is at or above fixed, fixed wins on expected cost and on cash-flow predictability.

Decision factor 4: refinance optionality. Floating loans typically have lighter prepayment penalties than fixed (open prepay windows, declining-percent vs. yield maintenance or defeasance). A sponsor with refi optionality value (might want to recap at year 3 or 4) gives up real flexibility by going to a fixed structure with heavy prepay.

See the existing fixed-vs-floating decision framework for the full borrower-side comparison and the worked examples by deal type.