In the latest episode of Location Cubed, Howard Altshuler, Partner-in-Charge of Real Estate and Construction Services, and Aaron Grisz, Real Estate Tax Leader, offer a comprehensive discussion on expiring interest rate caps.
- Understanding rate caps
- The implications of expiring rate caps
- The lender's perspective
- Tax implications
Many investors are navigating uncharted waters as the real estate market grapples with the pressing issue of expiring interest rate caps. This complex situation and an unpredictable interest rate environment threaten to destabilize investment strategies and impact bottom lines.
Grisz introduces the concept of a rate cap, an insurance-like derivative instrument that constrains the interest rate on a loan. Particularly relevant to real estate owners and developers dealing with floating rate debt, rate caps provide a safety net against soaring interest rates, ensuring interest payments don't exceed a preset maximum.
However, Altshuler and Grisz highlight that rate caps aren't without risk. The premium for a rate cap is contingent on current market interest rates and future projections. The escalating cost of rate caps has been dramatic, with a 3% three-year, $100 million rate cap that cost $100,000 in April 2019 now priced at a whopping $3.5 million.