SOFR, Prime, or Treasury: Understanding Interest Rate Benchmarks
Open any commercial real estate term sheet and you'll see one of three benchmarks: SOFR, Prime, or Treasury. Each one is a different reference rate that determines your loan pricing, and which one your loan is built on has major implications for your cost of capital, your interest rate risk, and your prepayment flexibility.
Most borrowers know what these acronyms are. Far fewer understand what they actually mean, how they move, and why a lender chose one over another for their specific loan.
In this week's Debt Fridays, we're breaking down the three major benchmarks behind CRE lending: how each one works, when each is used, and how to think about benchmark selection on your next deal.
The Big Picture: Why Benchmarks Matter
Every commercial mortgage rate is built the same way:
Rate = Benchmark + Lender Spread
The benchmark is the market-based reference rate the lender doesn't control. The spread is the lender's premium for taking your specific risk. The benchmark moves with broader market conditions. The spread moves only when the lender repriced or you renegotiated.
Three benchmarks dominate CRE:
- U.S. Treasury yields (typically 5-year or 10-year)
- SOFR (Secured Overnight Financing Rate)
- Prime Rate
Each one tracks a different part of the interest rate curve. Each one is used for different loan types. And each one moves for different reasons.
U.S. Treasury Yields
What It Is
Treasury yields are the interest rates the U.S. government pays to borrow money. They're considered the closest thing to a risk-free rate in global finance and serve as the benchmark for almost all long-term fixed-rate lending in the United States.
The two most commonly referenced for CRE:
- 5-Year Treasury: Often used for 5-year fixed-rate loans
- 10-Year Treasury: The most common benchmark for 7-10 year fixed-rate CRE loans
Other Treasury tenors (2-year, 7-year, 30-year) are referenced depending on the loan structure.
When It's Used
Treasury yields are the benchmark for:
- Fixed-rate permanent loans (banks, life insurance companies, CMBS)
- Most agency multifamily loans (Fannie Mae, Freddie Mac)
- Long-term debt where the lender wants to match-fund their asset
If your loan is fixed-rate, Treasuries are almost certainly the benchmark.
How It Moves
Treasury yields are driven by:
- Inflation expectations: Higher expected inflation pushes long-term rates up
- Federal Reserve policy: Anticipated Fed actions move long-term rates
- Government supply: Heavy Treasury issuance can push yields up
- Global capital flows: Foreign demand for U.S. Treasuries pushes yields down
- Economic growth expectations: Strong growth signals higher rates ahead
The 10-year Treasury is the single most-watched interest rate in the world. Its movements drive the cost of long-term capital across the economy.
Current Pricing
As of June 2026, the 10-year Treasury is in the 4.0-4.3% range. A typical CRE permanent loan priced over the 10-year Treasury with a 175-225 basis point spread comes in at approximately 5.75-6.55%.
SOFR (Secured Overnight Financing Rate)
What It Is
SOFR is the benchmark for floating-rate loans in the U.S. It's calculated based on actual transactions in the Treasury repurchase (repo) market, making it more transparent and harder to manipulate than the LIBOR rate it replaced in 2023.
SOFR comes in multiple forms:
- Overnight SOFR: The raw daily rate
- Term SOFR: A forward-looking version published for 1-month, 3-month, 6-month, and 12-month periods. 1-month and 30-day Term SOFR are the most common for CRE.
- SOFR Averages: Compounded averages over various periods
When It's Used
SOFR is the benchmark for:
- Floating-rate bridge loans
- Floating-rate construction loans
- Floating-rate value-add and transitional debt
- Most private credit and debt fund senior loans
- Some bank floating-rate term loans
If your loan is floating-rate, it's almost certainly priced over SOFR.
How It Moves
SOFR tracks short-term interest rates very closely:
- Federal funds rate: SOFR moves in lockstep with the Fed's target rate
- Monetary policy: Fed cuts immediately lower SOFR; Fed hikes immediately raise it
- Bank funding stress: Spikes in repo markets can briefly push SOFR up
SOFR is the most volatile of the three benchmarks because it responds directly to Fed policy. When the Fed cuts rates, your floating-rate loan rate drops the same month. When the Fed hikes, your rate goes up.
Current Pricing
As of June 2026, 1-month Term SOFR is approximately 3.65-3.85%. A typical CRE bridge loan priced over SOFR with a 300-450 basis point spread comes in at approximately 6.65-8.35% all-in.
The Rate Cap Issue
SOFR-priced floating loans almost always require the borrower to purchase an interest rate cap. The cap limits how high SOFR can go before the cap provider starts paying you back the difference. Cap costs are real, often $50K-$200K+ upfront on a multi-million dollar loan, and need to be factored into your true cost of capital.
Prime Rate
What It Is
Prime Rate is the interest rate banks charge their most creditworthy commercial customers. It's set by individual banks, but in practice, virtually all U.S. banks use the same Prime Rate, which moves in lockstep with the federal funds rate.
The formula is straightforward:
Prime Rate = Federal Funds Rate + 3.00%
When the Fed sets the federal funds rate at 4.00%, Prime is at 7.00%.
When It's Used
Prime is the benchmark for:
- Small commercial real estate loans (often under $5M)
- Lines of credit
- Some bank floating-rate loans, particularly from community and regional banks
- Owner-occupied and SBA-eligible loans
- Personal loans secured by real estate
Prime is rare on institutional CRE deals but common on smaller loans, particularly through community banks.
How It Moves
Prime moves whenever the Fed moves. There's effectively no independent movement. When the Fed cuts 25 basis points, Prime drops 25 basis points the same day. When the Fed hikes, Prime hikes by the same amount.
This makes Prime predictable but also fully exposed to monetary policy.
Current Pricing
As of June 2026, Prime is approximately 6.75-7.00%. Loans priced over Prime typically use Prime + 1.00-3.00%, putting the all-in rate at 7.75-10.00%.
Prime-based loans are generally more expensive than SOFR-based loans because they're typically used for smaller, higher-risk transactions where the lender wants a simple, well-known benchmark.
Comparing the Three: Where Each One Fits
| Benchmark | Typical Use | Loan Type | Rate Behavior |
|---|---|---|---|
| 10-Year Treasury | Long-term fixed CRE loans | Permanent loans, agency, CMBS, life co | Driven by inflation, Fed, growth expectations |
| SOFR | Floating-rate CRE loans | Bridge, construction, value-add, private credit | Tracks federal funds rate; immediate Fed response |
| Prime Rate | Small floating-rate CRE | Community bank loans, lines of credit, SBA | Moves with federal funds rate, 1:1 |
Which Benchmark Should You Want?
This isn't usually your choice. The benchmark is determined by the loan structure and lender type:
- Fixed-rate loan from a life co or CMBS lender → Treasury-based
- Bridge loan from a debt fund → SOFR-based
- Community bank loan on a small property → Prime or SOFR-based
But understanding the benchmark helps you understand the rate risk you're taking on:
If your loan is Treasury-based (fixed-rate):
- Your rate is locked in once set
- You don't benefit if rates fall
- You're protected if rates rise
- Prepayment is usually restricted (yield maintenance or defeasance)
- This is "buy your rate"
If your loan is SOFR or Prime-based (floating):
- Your rate adjusts monthly with the benchmark
- You benefit if the Fed cuts rates
- You're exposed if the Fed hikes
- Prepayment is usually more flexible
- This is "rent your rate"
The borrower's question isn't "which benchmark?" It's "which benchmark fits my hold strategy?"
The 2026 Yield Curve Quirk
For most of the past two years, the U.S. yield curve has been unusual: short-term rates (SOFR, Prime) have been higher than long-term rates (Treasuries). This is called an "inverted" curve.
What this means for borrowers in 2026:
- Floating rates haven't been meaningfully cheaper than fixed rates the way they usually are
- Fixed-rate loans look unusually attractive compared to floating in many cases
- The traditional case for floating (lower initial rate) doesn't hold when the curve is flat or inverted
The curve has been flattening through 2026 as the Fed has cut short-term rates. But fixed and floating rates remain close, which makes the "fixed gets you certainty for free" argument more compelling than it usually is.
What Happens When the Benchmark Moves
Understanding how rate movements affect your loan is critical to evaluating any term sheet:
Treasury-Based Fixed Loan: $10M at 6.25%
- Treasury rises 50 bps tomorrow: your rate stays 6.25% (locked)
- Treasury falls 50 bps tomorrow: your rate stays 6.25% (locked)
- Refinancing in year 5: new rate driven by where Treasury is then
SOFR-Based Floating Loan: $10M at SOFR + 325 = 6.90%
- SOFR rises 50 bps: your rate becomes 7.40%
- SOFR falls 50 bps: your rate becomes 6.40%
- Annual rate exposure on $10M: $50K per 50 bps SOFR movement
Prime-Based Loan: $10M at Prime + 1.50 = 8.25%
- Fed cuts 25 bps: your rate immediately becomes 8.00%
- Fed hikes 25 bps: your rate immediately becomes 8.50%
- Direct exposure to Fed policy
Questions to Ask About Your Benchmark
When reviewing a term sheet, understand:
- Which benchmark is the loan priced over?
- What's the spread over that benchmark?
- For floating-rate loans: how often does the rate reset? (Monthly is standard)
- Is there a floor rate? (Lenders sometimes include a minimum rate that floats up but not below a certain level)
- For SOFR loans: what's the rate cap requirement, term, and cost?
- How are payments structured if the benchmark moves?
- What was the all-in rate at the most recent reset?
A clear understanding of these answers is the difference between knowing your rate and knowing your exposure.
The Bottom Line
Three benchmarks dominate commercial real estate lending in 2026:
- U.S. Treasury yields drive fixed-rate permanent loans. The 10-year is the most-watched.
- SOFR drives floating-rate bridge, construction, and private credit loans. It tracks Fed policy directly.
- Prime Rate drives smaller bank loans and lines of credit. It moves 1:1 with the federal funds rate.
Your loan's benchmark determines how your rate moves over the life of the loan. It also determines your interest rate risk and your prepayment flexibility.
Understanding which benchmark sits underneath your loan, and why your lender chose it, is one of the most fundamental skills in CRE financing. Get this right and every other rate decision gets easier.
Want to compare term sheets priced over different benchmarks? Submit your deal on LenderAve and see how lenders structure loans for your specific property and hold strategy.
About Debt Fridays
Debt Fridays is LenderAve's weekly blog series delivering practical insights on commercial real estate financing. Published every Friday, we cover everything from lending basics to advanced deal strategies. Subscribe to never miss an issue.
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Tags: Debt Fridays, Commercial Real Estate, CRE Financing, CRE Basics, SOFR, Treasury Yields, Prime Rate, Interest Rate Benchmarks, Floating Rate, Fixed Rate