How Interest Rate Swaps Work in CRE Lending (and Why You Need a Swap Consultant) | Hue Chen CRE

Most CRE loans today start as floating rate and are fixed through interest rate swaps — but few owners know you can bring in a swap consultant to protect your bottom line.

Connect with Joe Long with Pensford Financial - pensford.com

In this video, I share what I learned from a conversation with Joe Long at Pennsford Financial about:
⭐ What interest rate swaps are and why they matter in commercial real estate financing
⭐ How swap consultants help review swap documents and ensure fair pricing
⭐ Why being on the phone with a Bloomberg terminal at rate lock can save you serious money
⭐ The shift in the industry: from fixed-rate balance sheet loans 12 years ago to today’s floating + swap structure

At Saglo Companies, we’ve been around for 50 years — but only started using swaps in the last eight. If you haven’t considered them, this might be the most overlooked tool in your financing toolkit.

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Video Chapters
0:00 - Intro: How to Fix a Floating Rate Loan
Hugh Chen introduces the topic of turning a floating-rate loan into a fixed-rate loan using interest rate swaps.

0:15 - From Traditional Loans to Swaps
Hugh explains his background in commercial real estate and how his company, Saglo, transitioned from using traditional fixed-rate loans (CMBS, Life Co, Bank Balance Sheet) to using swaps.

1:23 - How a Swap Works (The Simple Explanation)
A basic, high-level overview of the mechanics: how the borrower's rate stays fixed because a counterparty offsets the fluctuations of the bank's floating rate.

2:28 - Why You Need an Advisor Like Pensford
Hugh shares his early experiences of executing swaps without an advisor, highlighting the lack of transparency and the risk of not getting a fair market rate.

5:39 - What is a Swap, Technically?
Joe Long from Pensford gives the technical definition of an interest rate swap as a separate contract that provides certainty and a fixed rate for a floating rate loan.

9:04 - Why Do Banks Prefer Floating Rate Loans?
The speakers discuss why commercial banks often prefer to offer floating-rate debt—it reduces their own balance sheet risk, especially in a volatile interest rate environment.

13:35 - The Math: How a Swap Creates a Fixed Rate
Joe provides a detailed example of the cash flows, explaining how the SOFR index paid on the loan is canceled out by the SOFR received from the swap, leaving the borrower with a net fixed rate.

14:45 - What is SOFR?
An explanation of the Secured Overnight Financing Rate (SOFR), what it is, how it's determined, and why it replaced the old LIBOR index.

20:01 - Meet the Experts: Joe Long & Hugh Chen
Joe and Hugh formally introduce themselves and their respective companies (Pensford and Saglo), establishing their expertise in the field.

25:09 - How are Long-Term Swap Rates Determined?
Joe explains the concept of the "forward curve," which is the market's expectation of future SOFR rates, and how that is used to calculate a 5- or 10-year swap rate.

28:16 - Why are Swap Rates Lower Than Treasury Rates Right Now?
A discussion of the market dynamics (specifically Dodd-Frank regulations) that have created more demand for swaps, pushing their rates below comparable Treasury yields.

32:25 - The Bank's Profit: Mid-Market Rate vs. Your Rate
A crucial breakdown of the different swap rates, explaining the "mid-market" (break-even) rate versus the rate the borrower pays, which includes the bank's profit, also known as the "credit charge."

39:39 - Negotiating the "ISDA" Agreement
The importance of negotiating the ISDA (International Swaps and Derivatives Association) agreement, which governs the swap and is not just boilerplate.

41:13 - The Swap Desk vs. Your Relationship Manager
An inside look at the different motivations between your day-to-day bank relationship manager and the bank's swap desk trader, and why a good relationship doesn't guarantee a good deal on the swap.

45:47 - The ROI: A Story of a $700,000 Savings
Joe shares a real-world example of how shopping a swap's credit charge among syndicate lenders saved a client $700,000.

52:56 - What is a Swap "Unwind"?
Explanation of how you exit a swap early if you sell or refinance a property, and how the prepayment (or "breakage") cost is calculated based on where rates are at that time.

57:00 - Creative Hedging Strategies for Flexibility
Discussion of advanced and flexible strategies, such as hedging only a portion of a loan, using shorter-term hedges on longer-term loans, or executing a "forward swap."

58:33 - Final Thoughts & How to Connect
Joe and Hugh wrap up with final thoughts and provide information on how to connect with Pensford and Saglo Companies.


📌 About this Channel:
I'm Hue Chen, a real estate investor and operator focused on shopping centers and retail CRE. I share insights on leasing, acquisitions, operations, tech, and scaling a management company.

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