Glossary
Debt Yield
Debt yield is a commercial real estate lending metric equal to a property's net operating income divided by the loan amount. It shows the return a lender would earn on its loan if it took over the property, and unlike DSCR or LTV it is not affected by interest rates, amortization or cap rates.
Formula
Example
A lender is asked for a $10,000,000 loan on an office building with NOI of $950,000. Debt yield = $950,000 / $10,000,000 = 9.5%. If the lender's minimum is 10%, the maximum loan is $950,000 / 0.10 = $9,500,000, so the request would be cut by $500,000 regardless of how low the interest rate is or how long the amortization runs.
How it is used in underwriting
Lenders use debt yield as a check that cannot be manipulated by financing terms. DSCR can be inflated with a lower rate, interest-only periods or longer amortization, and LTV depends on an appraised value that moves with cap rates. Debt yield ties the loan only to the income the property actually produces. Underwriters often size a loan on three constraints, maximum LTV, minimum DSCR and minimum debt yield, and the loan amount is the lowest of the three results. In low rate environments, debt yield is frequently the binding constraint.
Debt yield is most common in commercial mortgage-backed securities, life company and bank lending on stabilized properties. For construction or transitional loans, lenders may look at debt yield on stabilized NOI instead of in-place NOI, which is a projection and should be treated with caution. A common mistake is calculating it on NOI before reserves when the lender underwrites net cash flow after reserves. Debt yield also differs from cap rate: cap rate divides NOI by value, while debt yield divides NOI by the loan, so debt yield equals cap rate divided by LTV.
Typical benchmarks
Many commercial lenders cite minimum debt yields of roughly 8% to 10% for stabilized properties, with higher thresholds for hotels, secondary markets or weaker credits.
Run the numbers: Debt Yield Calculator
Frequently asked questions
What is a good debt yield?
Many commercial lenders look for a debt yield of at least 8% to 10% on stabilized properties, with higher minimums for riskier asset types. A higher debt yield means a smaller loan relative to income and a larger cushion for the lender if it ever had to take the property back.
Why do lenders use debt yield instead of DSCR?
Lenders use both. DSCR depends on the interest rate and amortization, so it can look strong simply because borrowing costs are low. Debt yield ignores loan terms and cap rates, so it gives a stable measure of risk that does not change when rates or valuations move.
How do you calculate the maximum loan from debt yield?
Divide net operating income by the lender's minimum debt yield. For example, $800,000 of NOI divided by a 10% minimum gives a maximum loan of $8,000,000. Lenders then compare this with the maximum loans implied by their LTV and DSCR limits and use the lowest.
Related terms
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