by Ron Holmes.
The London Interbank Offered Rate (LIBOR) has been the go-to reference rate for trillions of dollars in real estate secured loans, and other loans. In the real estate industry, it is “the” alternative index rate for floating rate loans. That is changing. As a result of the rate rigging scandal that surfaced in 2012, LIBOR submissions have been shown to be subject to manipulation. Thus, financial institutions are moving away from LIBOR upon the belief LIBOR will not be around after 2021. While alternatives have been proposed, there does not seem to be, at least at this time, a standard substitute.
In most commercial real estate floating rate loan documents, there are provisions addressing what will happen if LIBOR is no longer available, but those provisions are typically rather loose (borrower and lender will renegotiate a replacement index). The more recent real estate floating rate loan documents warn of the imminent death of LIBOR and provide more specifics concerning possible replacement indexes [e.g. the secured overnight financing rate published for such day by the New York Federal Reserve Board “SOFR”)] but an agreement must still be reached as to what replacement index will be used. In the interim, such loan documents may provide that no further advances will be made in Eurodollars but only US dollars at the SOFR, with some type of adjustment. In large loans, we could be talking real money differences.
Practice Tip: You should no longer take for granted that LIBOR will be around beyond 2021 and should focus on what your loan agreement provides for as a replacement index and what happens until a replacement index is agreed upon.
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About Ron Holmes
His real estate law practice is as broad as it is deep. Mr. Holmes has served as lead counsel on real transactions all across the United States (more than twenty States), representing public and private companies, both domestic and international, in all manner of real estate transactions, including large scale multi-use land developments and high rise residential condominiums, to acquisitions and sales of operating property portfolios, office, industrial and retail leasing and virtually every other form of real estate development, construction, financing, investing and leasing.Learn more about Ron…