Assignment: the cap remains in force; right to receive payments transfers to a new beneficiary; original sponsor remains contractual counterparty. Novation: original cap terminates and a new cap is created with the new sponsor as counterparty; requires consent and a fee . Novation is cleaner but pricier; assignment is cheaper but leaves original sponsor on hook.
When each transfer mechanic is appropriate
Loan sale or assumption: when a loan is sold or assumed by a new borrower, the rate cap typically must transfer with the loan. Novation is the cleaner mechanic: the new borrower becomes the cap counterparty and the seller is fully released. Most cap counterparties charge a novation fee (typically $5K to $25K) and require credit underwriting on the new counterparty.
Refinance with new lender: when refinancing the loan to a new lender, the existing cap can be assigned to the new lender as protection on the new loan, terminated, or sold. Assignment is sometimes appropriate if the cap remains in the money and the new lender is willing to accept the assignment; termination plus a new cap is more common.
Sponsor entity restructure: when the sponsor's entity structure changes (e.g., new investor admitted, sponsor recap), the cap counterparty may require novation to the new entity. Novation requires consent from the cap counterparty and typically fresh ISDA documentation.
Practical mechanics: novations take 4 to 8 weeks to document; assignments take 1 to 2 weeks. Time both mechanics into the underlying transaction's closing schedule to avoid the cap mechanic delaying loan close.
Sources
- Secured Overnight Financing Rate (SOFR) · Federal Reserve Bank of New York · daily
- Semiannual Risk Perspective · Office of the Comptroller of the Currency · 2025-12