Updated · Part of the CRE investment glossary
How debt yield works
Debt yield answers a lender’s worst-case question: if the borrower defaults and the lender owns the property, what return does the NOI give on the money lent? A 10% debt yield means one year of NOI equals 10% of the loan.
The OCC’s Comptroller’s Handbook on commercial real estate lending describes it as a measure of risk that is independent of the interest rate, the amortization period and the capitalization rate, and notes that lower debt yields indicate higher leverage. That independence is the point. DSCR improves when rates fall and LTV improves when cap rates compress; debt yield moves only when NOI or the loan amount changes.
Lenders, especially CMBS and other institutional lenders, commonly set a minimum debt yield alongside DSCR and LTV. There is no single figure: each lender sets its own minimum by property type, market and loan program, and riskier properties are expected to show more.
The formula
Use the lender’s underwritten NOI and the full loan amount:
Debt yield = NOI ÷ loan amount; maximum loan = NOI ÷ minimum debt yield
- NOI: the lender’s underwritten net operating income, usually in-place, not pro forma.
- Loan amount: the full commitment, including any future funding the lender has agreed to advance.
- Because NOI ÷ value is the cap rate, debt yield also equals cap rate ÷ LTV. A 6% cap rate at 60% LTV is a 10% debt yield.
Worked example: sizing a loan
A property produces $900,000 of underwritten NOI. The borrower asks for $10,000,000, a 9.0% debt yield. The table shows the largest loan each minimum allows.
At a 10% minimum, the request is cut to $9,000,000 and the buyer brings $1,000,000 more equity. Now hold that $9,000,000 loan and change only the rate. Interest-only debt service is $450,000 at 5% and $630,000 at 7%, so DSCR falls from 2.00x to 1.43x. Debt yield stays at 10% in both cases.
| Minimum debt yield | Calculation | Maximum loan |
|---|---|---|
| 8% | $900,000 ÷ 0.08 | $11,250,000 |
| 9% | $900,000 ÷ 0.09 | $10,000,000 |
| 10% | $900,000 ÷ 0.10 | $9,000,000 |
| 11% | $900,000 ÷ 0.11 | $8,181,818 |
Debt yield vs DSCR vs LTV
Lenders often size a loan on all three tests and lend the lowest result. Each guards against a different risk:
- DSCR (NOI ÷ debt service): can the property pay the loan at today’s rate and amortization? It moves with interest rates.
- LTV (loan ÷ value): is there an equity cushion below the loan? It moves with appraised value and cap rates.
- Debt yield (NOI ÷ loan): how much income supports each dollar of debt, whatever rates and values do.
- In low-rate, low-cap-rate markets, DSCR and LTV can both allow a large loan; debt yield is often the test that binds. The OCC handbook makes the same point about using debt yield to set loan amounts that hold up if rates rise.
Common mistakes
Debt yield is one division, so errors come from the inputs:
- Using pro forma NOI. Lenders commonly size on in-place or trailing NOI, so planned rent increases do not raise the loan.
- Leaving out future funding. On a bridge loan, the lender may test debt yield on the full commitment, including capex draws.
- Treating it as a covenant only at closing. Some loans test debt yield periodically, and a drop can trigger cash management.
- Comparing it with a cap rate. A 9% debt yield is not “better” than a 6% cap rate; they measure different things.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.