Debt Yield

Debt yield is a property’s net operating income divided by the loan amount, expressed as a percentage — a leverage check that, unlike DSCR or LTV, ignores the interest rate, amortization schedule, and appraised value entirely. A property with $810,000 of NOI seeking a $9,000,000 loan has a 9% debt yield: strip away every financing assumption, and that is the return the lender would earn on its money in the first year if it had to take the property back and operate it directly.

Debt yield exists because DSCR alone can be fooled by rate and amortization: a low enough rate or long enough am schedule can make a loan look safely covered even at very high leverage, and that was exactly the underwriting weakness investors blamed for pushing CMBS leverage too high in the run-up to 2008. CMBS conduits and many life-company lenders now set a minimum debt yield floor — commonly in the 8%–10% range on stabilized multifamily and industrial, higher on office and hotel — and size the loan to whichever of DSCR, LTV, or debt yield produces the smallest number. In a low-rate environment debt yield is usually the binding constraint even when DSCR looks comfortable; borrowers who only ask what DSCR a lender needs are missing the metric that can quietly cap proceeds on a conduit or life-company quote.

Because debt yield behaves differently than DSCR when rates move, it is one of the more revealing numbers in a lender’s observed terms — when a lender in our coverage quotes a debt yield floor rather than just a DSCR target, that is usually a signal of how that lender’s capital source underwrites, and we note it accordingly.