What Is Debt Yield in Commercial Real Estate?
Debt yield is a property's net operating income divided by the total loan amount, expressed as a percentage. Lenders use it to measure loan risk independent of interest rate, amortization, or loan term, making it one of the most manipulation-resistant metrics in CRE lending.
Debt Yield Formula
The formula uses only two inputs, both of which are straightforward to verify.
Example: A property generates $600,000 in NOI and has a $6,000,000 mortgage.
Why Debt Yield Is Interest-Rate Independent
This is the core advantage of debt yield over DSCR. The debt service coverage ratio changes when rates move, amortization schedules shift, or interest-only periods are applied. Debt yield stays constant because it ignores debt service entirely.
Consider a $10 million loan on a property with $1 million NOI. The debt yield is 10% regardless of whether the interest rate is 4% or 7%. The DSCR, however, would swing from roughly 1.55x at 4% to 1.10x at 7%, painting two very different risk pictures from the same underlying property.
This consistency is why CMBS lenders and rating agencies adopted debt yield as a standard underwriting metric, particularly after the 2008 financial crisis revealed how easily DSCR could be engineered through aggressive loan structures.
Minimum Debt Yield Requirements by Lender Type
Different lender categories apply different debt yield floors. These thresholds determine maximum loan proceeds alongside LTV and DSCR constraints.
| Lender Type | Typical Min. Debt Yield | Notes |
|---|---|---|
| CMBS / Conduit | 10% - 12% | Often the binding constraint on proceeds |
| Agency (Fannie/Freddie) | 8% - 10% | Multifamily only, used alongside DSCR |
| Life Insurance Co. | 9% - 11% | Conservative underwriting, low LTV |
| Regional / Community Bank | Varies | May not formally require, focus on DSCR |
| Bridge / Debt Fund | 7% - 9% | Higher risk tolerance, transitional assets |
Guidelines reference Fannie Mae multifamily lending and FDIC CRE lending data.
Debt Yield vs DSCR vs LTV
Lenders typically size loans using the most restrictive of three tests: LTV (loan-to-value), DSCR (debt service coverage ratio), and debt yield. Understanding how they interact determines your maximum proceeds.
- LTV caps the loan as a percentage of appraised value. Straightforward but dependent on appraisal assumptions.
- DSCR ensures the property's income covers debt service. Sensitive to rate and amortization terms.
- Debt yield sets a floor on the return the property generates per dollar of debt. Rate-independent and hard to engineer.
In a rising-rate environment, debt yield often becomes the binding constraint because it limits proceeds regardless of how the loan is structured. Borrowers who only model DSCR may overestimate available leverage.
How to Use Debt Yield in Underwriting
Start by calculating the maximum loan amount implied by the lender's debt yield requirement. If a lender requires a 10% minimum debt yield and the property produces $800,000 in NOI, the maximum loan is $8,000,000.
Compare this to the LTV and DSCR implied loan amounts. The lowest of the three determines actual proceeds. Running all three constraints simultaneously in your pro forma prevents surprises during the loan application process.
Another practical application is reverse-engineering the NOI needed to qualify for a target loan amount. If you need $10,000,000 in proceeds and the lender requires a 10% debt yield, the property must generate at least $1,000,000 in NOI.
This reverse calculation is useful when evaluating value-add deals where the acquisition loan is based on in-place NOI but the business plan projects higher stabilized income.
Common Debt Yield Mistakes
Several errors commonly appear in debt yield calculations, particularly among newer analysts.
- Using pro forma NOI instead of in-place NOI. Most lenders calculate debt yield on current or trailing NOI, not projected figures. Pro forma debt yield may be relevant for bridge loans, but agency and CMBS lenders want actual performance.
- Ignoring reserves. Some lenders calculate debt yield on NOI after replacement reserves, which produces a lower figure. Always confirm whether the lender uses NOI or NOI after reserves.
- Confusing debt yield with equity yield. Debt yield measures lender risk. Equity yield (cash-on-cash return) measures investor returns. They use different denominators and serve different purposes.
- Not running all three constraints. Debt yield alone does not determine maximum proceeds. Always model LTV, DSCR, and debt yield simultaneously. The most restrictive test governs.
Worked Example: Sizing a Loan with Debt Yield
Consider a 150-unit multifamily property with $1,200,000 in NOI and an appraised value of $20,000,000. The lender's requirements are 75% max LTV, 1.25x min DSCR (at 6.5% rate, 30-year amortization), and 10% min debt yield.
LTV test: $20,000,000 x 75% = $15,000,000
DSCR test: $1,200,000 / 1.25 = $960,000 max debt service
At 6.5%, 30yr: $960,000 supports = $15,161,000
Debt yield test: $1,200,000 / 10% = $12,000,000
Binding constraint: Debt yield at $12,000,000
In this example, the debt yield test produces the lowest loan amount, making it the binding constraint. The borrower would receive $12,000,000 in proceeds, not the $15,000,000 that LTV alone would suggest. This is a common outcome in today's lending environment.
When Debt Yield Becomes the Binding Constraint
In low-rate environments, LTV and DSCR tend to be the binding constraints because high property values limit LTV-based proceeds. When rates rise, two things happen simultaneously. Property values decline (increasing LTV-based proceeds relative to purchase price), and DSCR tightens (reducing DSCR-based proceeds).
Debt yield cuts through this complexity. It remains constant regardless of rate movements, so it becomes particularly important during rate transitions when LTV and DSCR signals conflict.
For this reason, sophisticated borrowers always include debt yield in their preliminary screening. If a deal does not meet the minimum debt yield threshold, no amount of creative loan structuring will fix the shortfall.
Why Debt Yield Gained Prominence After 2008
Before the 2008 financial crisis, many CMBS loans were sized primarily on DSCR and LTV. Aggressive loan structures (interest-only periods, extended amortization, low rates) allowed borrowers to achieve high DSCR ratios on loans that were actually quite risky relative to the property's income.
When the market collapsed and property values dropped 30% to 40%, these loans defaulted at high rates. Rating agencies and regulators recognized that DSCR alone was insufficient because it could be engineered through loan structure rather than property performance.
Debt yield emerged as the corrective metric. It strips away all loan structuring and asks a simple question: what percentage return does this property generate on the total loan balance? This simplicity makes it resistant to manipulation and explains why it has become a standard requirement across institutional lending.
Using Debt Yield for Quick Deal Screening
Before diving into a full pro forma, calculate the implied debt yield at your target leverage. If the result falls below the lender's minimum, the deal will not pencil without additional equity or a lower purchase price.
For example, a property with a 5.5% cap rate and 75% LTV implies a debt yield of approximately 7.3% (5.5% / 0.75). If the lender requires 10%, this deal cannot achieve 75% leverage. Maximum LTV would be closer to 55% ($NOI / 10% = max loan, then max loan / value = LTV).
This 30-second calculation saves hours of detailed modeling on deals that will not meet financing requirements. Teams that use tools like Primer to extract NOI from offering memorandums can run this screen immediately upon receiving new deal flow.