Commercial Mortgage Quick Reference Guide

Debt Yield

Debt yield is one of the most important risk metrics in commercial and multifamily real estate. It can be determined by taking the net operating income and dividing it by the total loan amount. Lenders use debt yield to understand how long it would take for them to recoup their investment if they had to take possession of a property after a loan default.

Debt Yield Example Calculation

As we just mentioned, debt yield is calculated by taking the net operating income and dividing it by the total loan amount. For instance, if a commercial property’s income was $200,000 and the entire loan amount was $1,500,000, the debt yield would be:

$200,000/$1,500,000 = 0.133 or 13.33%

Many lenders now require a minimum debt yield in order to approve a loan, so it’s also possible to calculate the maximum loan amount, as long as you know the annual income of a property. For instance, if, in the example above, a lender had a minimum debt yield requirement of 12%, a borrower would be able to take a loan out of up to $1.66 million (as long as that amount was consistent with other factors, like LTV and DSCR).

$200,000/0.12 = $1,666,666

To extrapolate, a debt yield of 12% would mean that it would take a lender about 8.3 years to recoup their losses, assuming they did not sell the property beforehand, NOI did not increase, and the borrower defaulted immediately.

Why Some Lenders Prefer Debt Yield to DSCR, LTV, and Cap Rate

Risk metrics like DSCR can easily be skewed by low interest rates and long amortizations, but debt yield stays the same, no matter what a borrower’s monthly are. In this way, a debt yield can be a better way to gauge the true risk of a loan, as well as to compare it to other loans on similar properties. While debt yield requirements vary, most lenders prefer debt yields of 10% or above. However, for premium properties located in top-tier markets, say, New York City or Los Angeles, many lenders may be willing to accept debt yields as low as 9%, or even 8% in highly exceptional circumstances.

While LTV does not change based on the specifics of a loan, it can vary greatly based on market conditions. For instance, if real estate prices spike (as they did in the early 2000s), a property’s LTV ratio could fall significantly, without the true risk for the lender falling that much. For example, a $800,000 loan on a property valued at $800,000 would have an LTV ratio of 100%— considered highly risky. However, if, over a 1-2 year period, the property value increased to $1 million, the LTV would fall to 80%, which is considered a reasonable risk for many commercial lenders.

The problem for lenders, however, is that markets constantly fluctuate, and the market could fall even more in the next 12-24 month period than it rose in the previous one. If it fell, say, by 30%, the LTV on the property would be 114%, putting it squarely ‘underwater’ and putting the lender at significant risk.

Debt yield is very similar to cap rate, but since cap rate divides a property’s income by its current market value, it’s also susceptible to variations in the market price of a property.


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