Definition
Debt yield is a lender-focused metric that measures a property’s income relative to the loan amount. It is calculated as NOI ÷ Loan Amount. Conceptually, it answers: “If the lender ended up owning the property at the loan basis, what unlevered yield would the NOI produce?â€
How It’s Calculated
Formula
- Debt Yield = Net Operating Income (NOI) ÷ Loan Amount
Debt yield is usually expressed as a percentage (e.g., 8.5%, 10.0%).
Why Lenders Care
Unlike DSCR, debt yield is not directly affected by the interest rate (because it ignores debt service). It is a simple way for lenders to size proceeds based on the property’s income and a desired margin of safety.
- Downside protection: higher debt yield generally means more income coverage relative to the loan.
- Rate independence: keeps underwriting disciplined even when rates move.
- Collateral focus: reflects the lender’s reliance on property cash flow, not borrower equity returns.
Debt Yield vs DSCR vs LTV
- Debt Yield: NOI relative to loan size. Pure income-to-loan metric.
- DSCR (Debt Service Coverage Ratio): NOI relative to annual debt service. Sensitive to interest rates, amortization, and loan structure.
- LTV (Loan-to-Value): loan size relative to value (purchase price or appraisal). Sensitive to cap rates and valuation assumptions.
In practice, lenders often underwrite to multiple constraints and size the loan to the most conservative result among debt yield, DSCR, and LTV.
How It’s Used in Underwriting
- Loan sizing: lenders may require a minimum debt yield (e.g., 8%–10% depending on asset/risk).
- Stabilization tests: for value-add deals, the lender may underwrite in-place vs stabilized NOI separately.
- Refinance feasibility: investors use debt yield to sanity-check future proceeds at exit.
- Comparing structures: helps evaluate whether leverage is aggressive or conservative independent of rate.
Example
A property generates $900,000 in NOI and the proposed loan amount is $10,000,000.
- Debt Yield = 900,000 ÷ 10,000,000 = 9.0%
If a lender requires a 10.0% minimum debt yield, the maximum loan would be:
- Max Loan = NOI ÷ Required Debt Yield = 900,000 ÷ 0.10 = $9,000,000
Common Pitfalls
- Using “pro forma†NOI too early: lenders often size to in-place or underwritten NOI, not sponsor upside.
- Confusing with cap rate: cap rate is NOI ÷ value; debt yield is NOI ÷ loan amount.
- Ignoring recurring capex: if NOI is overstated because reserves/capex are understated, debt yield will look better than reality.
- Not stress-testing NOI: small NOI hits can materially reduce debt yield in tight deals.