Debt yield is a property’s net operating income divided by the loan amount, shown as a percentage. A $4.2M NOI on a $42M loan is a 10% debt yield. Lenders use it to size loans because it ignores interest rate, amortization and purchase price.
Lenders lean on debt yield because it does not move with interest rates or cap rates the way DSCR and LTV do. For many loans it is the first test the deal has to clear before anything else is priced.
If you’re on the buy side, you need to understand debt yield because it dictates how much leverage you can actually get. Your acquisitions team might underwrite to 65% LTV and a 1.25x DSCR, but if the property’s debt yield falls below the lender’s floor, none of that matters — the loan gets cut.
What is debt yield, and how do you calculate it?
Debt yield is the property’s net operating income divided by the total loan balance, expressed as a percentage.
$$\text{Debt Yield} = \frac{\text{NOI}}{\text{Loan Amount}}$$
A property with $4.2M of trailing NOI seeking a $42M loan has a 10% debt yield. If you foreclose and run the asset at current NOI, you recoup the principal in ten years, ignoring reinvestment. That’s the whole idea.
The metric strips away three variables that change a loan’s ultimate performance:
- Interest rate: irrelevant; debt yield doesn’t use it
- Amortization: irrelevant; debt yield doesn’t care how the loan is paid down
- Purchase price: irrelevant; debt yield ignores what the buyer paid
What remains is pure. How much does the property earn per dollar of debt? That’s a question about the asset, not the capital markets.
Why do lenders use debt yield instead of DSCR or LTV?
DSCR and LTV are the two metrics borrowers talk about at signing. Lenders monitor both throughout the life of the loan, but neither holds up well under stress.
DSCR is hostage to interest rates. On an interest-only loan, a 1.35x DSCR at 6.25% falls to about 1.13x if the rate goes to 7.50% on refinance. The property didn’t change; the debt service did. Lenders can’t underwrite tomorrow’s DSCR on today’s rate.
LTV is hostage to cap rates. A 65% LTV at a 5.0% cap becomes 85% LTV if cap rates expand to 6.5%. The loan didn’t change; the market pricing did. In a falling-cap-rate environment, LTV looks safe; in a rising-cap-rate environment, it looks reckless. Same loan, different signal.
Debt yield is immune to both because it uses NOI (from the property) and loan balance (from the closing statement). Neither moves with the market. That makes it the metric lenders use to set the underwriting floor before they start negotiating rate, amortization, or LTV.
The practical consequence: term sheets often state a minimum debt yield alongside, or ahead of, an LTV cap. When the debt yield floor binds, the deal is sized to it first and LTV falls out as the residual.
What debt yield do lenders require?
There is no published industry-wide floor. Each lender sets a minimum by property type, market, tenancy and loan program, and it changes with the lending environment. Treat any table of “standard” floors with caution, including ones you find in broker decks. Instead:
- Ask the lender for its current minimum debt yield on your property type before you underwrite leverage.
- Ask for the lender’s underwritten NOI. Lenders often underwrite their own NOI rather than the borrower’s, for example by applying a minimum vacancy, a minimum management fee and replacement reserves. That NOI, not the seller’s, is what the debt yield test uses, and it is also what DSCR is tested on.
- Compare the floor to the debt yield your deal produces at your target loan amount. The formulas below show the loan size at which you hit it.
Higher-risk assets generally face higher floors: shorter lease terms, tenant concentration, operating-expense volatility and thin markets all push lenders to want more NOI per dollar of loan.
What is the difference between debt yield, cap rate and DSCR?
Each metric answers a different question. Using all three together is how sophisticated acquisitions teams triangulate whether a deal actually pencils:
Cap rate answers: Is the asset priced correctly? (NOI ÷ price) DSCR answers: Does the current debt service work? (NOI ÷ debt service) Debt yield answers: How much loan can this NOI support? (NOI ÷ loan)
The relationship between them is mechanical. Debt yield equals cap rate divided by loan-to-value:
$$\text{Debt Yield} = \frac{\text{Cap Rate}}{\text{LTV}}$$
A 5.5% cap rate with 65% LTV produces an 8.5% debt yield. Push the LTV to 75% and debt yield falls to 7.3%, which may fall below a lender’s floor. This is why aggressive leverage gets cut: not because LTV is high per se, but because high LTV at today’s cap rates produces debt yields that lenders won’t touch.
The inverse is useful for deal screening. If a lender’s minimum debt yield is 8.5% and the asset trades at a 5.5% cap, the maximum LTV is 65% (5.5% ÷ 8.5%). Any capital stack above that needs mezzanine, preferred equity, or cash.
How do you stress-test debt yield in underwriting?
Acquisitions teams should stress debt yield the same way lenders do: by pressuring NOI, not by adjusting the loan balance. The loan balance is fixed at closing. NOI is what erodes.
Three scenarios worth modeling:
1. Trailing NOI, no growth. Most CMBS lenders underwrite to T-12 NOI with no forward growth assumption. Use the actual T-12 from the seller’s financials (not the pro forma) and recalculate debt yield. If you’re relying on post-acquisition rent bumps to hit the floor, the loan will be sized below your target.
2. NOI haircut. Apply a haircut to NOI (5% is a common test) and check the resulting debt yield. This approximates a vacancy blip or a mild downturn. Decide in advance how much cushion above the lender’s floor you require.
3. Refi stress. At the maturity date, model a refinance with a higher debt yield floor than today’s. If your exit cap rate produces a debt yield below the future lender’s floor, you have a refi risk, not an exit risk.
The output of all three scenarios should feed a single question: At what NOI level does the loan get called or refi-rejected? That’s your real debt yield floor, and it’s almost always tighter than the loan agreement specifies.
What should acquisitions teams check in loan documents?
Debt yield shows up in term sheets and loan agreements in specific places. When you’re reviewing documents, focus on these four:
Minimum debt yield covenant. Many permanent loans include an ongoing debt yield test that, if breached, triggers cash sweep or cash management. Know the number, know the measurement period (usually trailing-twelve), and know the cure.
Debt yield at origination vs. going-in. Some lenders measure debt yield on a trailing basis; others use pro forma NOI for year 1. The distinction can change loan proceeds materially. Check which the term sheet uses.
Step-downs. Some loans step the debt yield requirement down over time to accommodate scheduled rent increases. Confirm the step-down schedule is in the loan agreement, not just the term sheet.
Recalculation events. Major capital events (refinancing, partial release, transfer) often trigger a debt yield recalculation. If the property’s NOI has softened, the recalculation can fail even when the original loan is in good standing.
These provisions kill more CRE deals at the loan-review stage than cap rate assumptions do. Catching them during due diligence, not after the financing fails, is the difference between closing and re-trading.
How should acquisitions teams use debt yield?
Debt yield is blunt by design. It doesn’t try to predict refinance rates, forecast cap rates, or handicap tenant renewals. It answers one question — how fast does this property’s cash flow return a lender’s principal? — and refuses to guess at anything else. That’s why lenders trust it, and why acquisitions teams who understand it have an edge on sizing leverage.
The discipline around debt yield is straightforward: use real trailing NOI, use the total loan balance, apply the lender’s floor as a hard constraint, and stress the NOI before you stress anything else. Teams that do this consistently avoid the painful surprise of watching a term sheet’s loan amount shrink between IOI and closing.
For acquisitions teams operating across multiple deals, the ratio should be one of the first numbers computed on any prospective asset, ideally before the broker’s OM is open on screen. Getting it wrong late in diligence costs weeks; getting it right at screening keeps the pipeline honest.