When it comes to commercial real estate financing, a lot of attention gets paid to metrics like loan-to-value (LTV) and debt service coverage ratio (DSCR). But there’s another key figure that lenders increasingly rely on, especially in uncertain markets: debt yield. If you’re an investor or developer, understanding this metric can give you a clearer view of how lenders assess risk, and how that impacts your ability to secure financing.
What Is Debt Yield?
Put simply, debt yield is the net operating income (NOI) divided by the loan amount. Unlike LTV or DSCR, it doesn’t factor in interest rates or amortization schedules. Instead, it tells the lender how much income the property is generating relative to the size of the loan, offering a clear and direct measure of return.
Formula: Debt Yield = Net Operating Income / Loan Amount
So, if a property generates $500,000 in NOI and the requested loan amount is $5 million, the debt yield would be 10%.
Why Do Lenders Use It?
Lenders like debt yield because it gives them a back-to-basics look at deal risk. It helps them answer a key question: If we had to take over this property tomorrow, what kind of return would we be looking at based on income alone?
This is especially useful in markets where cap rates are compressing or interest rates are volatile. Unlike LTV, which can shift with property appraisals, or DSCR, which depends on loan terms, debt yield is fixed. That consistency gives lenders a clearer way to assess the risk profile of a loan.
Many lenders have a minimum debt yield threshold they won’t go below. In today’s environment, that’s often around 8% to 10% for stabilized assets. For higher-risk properties, such as construction projects or transitional assets, the bar is typically higher.
How Debt Yield Impacts Your Loan
Let’s say you’re pursuing a $10 million loan on a property that’s generating $700,000 in NOI. That works out to a debt yield of 7%. If the lender’s minimum is 9%, they’re likely to reduce the loan amount until the deal meets that benchmark.
In this case, they might cap the loan at about $7.8 million, even if the LTV and DSCR technically support a larger loan. The result is that you may need to bring more equity to the table or restructure the deal.
Example: The Impact in Real Numbers
Suppose you’re acquiring a multifamily property with an NOI of $900,000. You’re hoping to secure an $11 million loan.
Debt Yield = $900,000 / $11,000,000 = 8.18%
If the lender requires a minimum 9% debt yield, they’ll likely reduce the loan amount until it meets that standard. In this case, that would mean:
$900,000 / $10,000,000 = 9.00%
That one metric could reduce your loan amount by $1 million, even if everything else about the deal checks out.
What Borrowers Can Do
If you’re running into a debt yield issue, here are a few ways to approach it:
Increase NOI: Improving occupancy or reducing expenses can help boost income.
Lower the loan request: Slightly reducing leverage can help the deal meet lender criteria.
Explore alternative lenders: Some lenders may be more flexible depending on the asset or your experience.
It’s also worth noting that debt yield is a lender’s tool, not a fixed rule. If your deal doesn’t meet a specific threshold, it may still be financeable with the right structure or lender.
Final Thoughts
Debt yield is a simple ratio, but it plays a big role behind the scenes in CRE financing. Whether you’re buying, refinancing, or developing, understanding how lenders view your project through this lens can help you anticipate questions, strengthen your proposal, and ultimately secure better terms.
If you’re sizing up a new deal or exploring refinance options, feel free to reach out. We’re happy to walk through the numbers with you.
