Debt Yield

Debt yield has become an increasingly important underwriting metric for commercial real estate lenders, particularly after the 2008 financial crisis exposed the limitations of relying solely on LTV and DSCR. Unlike DSCR, which depends on the loan's interest rate and amortization schedule, debt yield is a pure measure of the property's income relative to the loan amount. This makes it useful for comparing loan risk across different interest rate environments and loan structures.

Most CMBS (commercial mortgage-backed securities) lenders and many balance-sheet lenders now require a minimum debt yield of 8-10%, with higher thresholds for riskier property types. A 10% debt yield means the property generates NOI equal to 10% of the loan balance each year. In theory, if the lender had to foreclose and sell the property, they would recover their investment at a cap rate equal to the debt yield, providing a margin of safety. Higher debt yields indicate more cushion for the lender.

For borrowers, the debt yield constraint can be more restrictive than LTV or DSCR in certain market conditions. In a low interest rate environment, a property might easily achieve a 1.25x DSCR and 70% LTV, but fail the 10% debt yield test, forcing a lower loan amount. Conversely, in a high interest rate environment, DSCR might be the binding constraint. Understanding which metric is limiting loan proceeds helps borrowers structure their capital stack and negotiate with lenders more effectively.