What is debt yield?

Debt yield expresses a property's net operating income as a percentage of the loan amount. It answers a simple question: if the lender took the property, what return would its NOI provide on the money lent? Unlike LTV, it does not depend on an appraiser's capitalization rate, and unlike DSCR, it does not depend on the interest rate or amortization schedule.

Commercial real estate lenders, especially in the CMBS and institutional markets, use a minimum debt yield as one of several loan sizing constraints alongside maximum LTV and minimum DSCR. A minimum around 8% to 10% is frequently cited, though requirements vary by property type, market and lender. The loan amount is set by whichever constraint produces the smallest loan.

Debt yield is only as good as the NOI used. Inflated or pro forma NOI produces a misleadingly strong ratio. Because it ignores the cost of debt, it should not replace DSCR when assessing whether a borrower can actually make payments. Lenders should also be consistent about whether the denominator is the initial funded amount or the fully funded commitment, which matters for construction and renovation loans.