When choosing between fixed and floating rate loans, find the interest rate breakpoint where your property's cash flow fails the lender's debt-service coverage covenant. If floating rates have only a 75-basis-point cushion above that breakpoint, you're betting on rates staying low.
Depending on your loan documents, you may have tripped a covenant. So the question is not, is floating cheaper today? Of course it is. The question is, at what rate does my building stop covering its debt at the level my lender requires? On this building, that breakpoint is right around 6.5%, which means an owner taking floating at 5.75% has about 75 basis points of room. That is not very much. If you are comfortable with that, floating may be right. If that makes you uneasy, you have your answer. Do not choose between fixed and floating by comparing today's rates. Choose by finding the rate at which your building stops covering its debt. Then ask honestly how much room you have.
