In light of the fact that many real estate lenders rely upon the London Interbank Offered Rate (LIBOR) as a principal index rate, there has been a great deal of concern throughout the industry about the anticipated phase-out of the much-used index, currently anticipated to occur at the end of 2021. As real estate financiers debate whether they may benefit from LIBOR’s replacement in the long-term and what existing or newly-minted index rate may ultimately replace LIBOR, lawyers working in the field should concentrate on ensuring that loan documents are drafted to preserve the benefit of lenders’ bargains even in the absence of the key index rate used to determine the loan’s all-in interest rate.
Contemplating a Substitution
Interest rates for floating rate loans based on the LIBOR index are typically priced on the basis of a 30-day LIBOR contract plus some negotiated “spread” over such index rate; the sum represents the loan’s “all-in” rate. In light of past events whereby specifically identified index rates unexpectedly became obsolete, many drafters of real estate finance documents regularly contemplate a substitution of the LIBOR index with an alternative “base rate” or “prime rate” should LIBOR cease to be a viable means for determining a loan’s interest rate. For instance, in the following loan document provision, a LIBOR loan is allowed to convert to an alternative “base rate” when LIBOR can no longer be ascertained:
