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LIBOR's scheduled phase out at the end of 2021 could havesignificant ramifications on the commercial real estate market.Currently, trillions of dollars of CRE loans in the US arepresently outstanding and based on LIBOR as an index.

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That has kept attorneys, like Adam Lustig, Partner, Real EstatePractice Group Leader, Bilzin Sumberg, busy.

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"We are counseling and advising clients on what the implicationsof the phase-out of LIBOR are in new loan transactions that we workon," Lustig says. "We are trying to anticipate the inevitable andbuild in some language [in loan documents] to account for whathappens when LIBOR phases out."

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Despite the scheduled changes, Lustig says there are still loans– with maturity dates beyond the end of 2021 – being closed outevery day based on LIBOR.

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"What has historically been in loan documents is language thatsays that if LIBOR is temporarily unavailable, then we will changethe benchmark to X, which frequently is the prime rate," Lustigsays. "That's intended to account for a temporary blip in themarket as opposed to the permanent phase-out of LIBOR."

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Jason Shapiro, managing director of Aztec Group, says a lot ofloan documents he has seen had language that accounted for shiftingfrom LIBOR to a suitable alternative. "In new documents coming now,you still see in a large number, at least of the floating rateloans, use LIBOR," Shapiro says.

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When representing borrowers, Lustig says he has been trying towork with lenders on negotiating language, explaining what willhappen when LIBOR becomes permanently unavailable. "Lenders havebeen receptive to working through that with us," he says. "I thinkthe industry hasn't quite settled on exactly how this is going towork."

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While the Secured Overnight Financing Rate, known as SOFR, hasbeen identified as the LIBOR replacement in the US, no one knowshow that is going to work, according to Lustig. "It's a verydifferent benchmark than LIBOR is," he says. "We try to do the bestwe can to get some language built into the documents to avoidunexpected or bad consequences, which is saying like 'If LIBOR'snot available, then the loan converts to a prime rate at the indexinstead of LIBOR.'"

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The goal is to reduce as many shocks as possible, such asinterest rates jumping 3%. "We build-in language that says when weshift to a new benchmark, that the spread will be adjusted as wellso that the all-in rate is substantially the same as it was beforeLIBOR phased out," Lustig says.

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Some far, clients haven't seemed phased by the shift. "From allaccounts, at least in the business that we are doing currently, ithasn't been a huge issue," Shapiro says. "A couple of questionshave come up, but it seems, most of our clients and their attorneysand those on the bank side, all seem fairly well versed in how todeal with it when the switch is flipped sometime next year. So, ithasn't been a huge deal."

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.