Debt Yield

What debt yield measures

Debt yield asks what return the lender would earn on its loan amount if it took the property back tomorrow and operated it as-is. Because the calculation uses only the property's income and the loan balance, it is unaffected by the interest rate, the amortization schedule, or the appraised value.

That independence is why credit committees lean on it. DSCR improves when rates fall or when a loan is interest-only. Loan-to-value improves when an appraiser assigns a higher value. Debt yield moves only when income or loan size moves.

How it is calculated

Debt Yield = Net Operating Income / Loan Amount

A worked example

A 40-unit property producing $364,000 of NOI against a $3,400,000 loan: $364,000 divided by $3,400,000 is 10.7 percent.

Now assume rates drop and the same property supports a $4,200,000 loan at the same coverage. Debt yield falls to 8.7 percent. The lender's exposure per dollar of income has risen while DSCR looks unchanged.

What lenders require

Requirements sit in each institution's credit policy and move with the cycle and the property type. Debt yield became a standard screen after 2008, when lenders found that loans passing DSCR and LTV tests at low rates and high valuations still failed when either assumption reversed.

It works best as a floor rather than a target: a minimum below which the loan does not proceed regardless of how the other ratios look.

Where debt yield goes wrong

• Pro forma NOI. Debt yield calculated on projected stabilized income rather than trailing actuals measures a forecast, not a position.
• Whole loan versus senior. On a stack with mezzanine or preferred equity, the yield on the senior loan alone understates the risk in the deal.
• Comparing across property types. A 9 percent debt yield on stabilized industrial and a 9 percent debt yield on a hotel are not the same risk.

Related terms

DSCR, net operating income, cap rate, loan-to-value.