A lender sizes a commercial real estate loan by running several tests on the same net operating income and lending the smallest amount that passes all of them. The usual three are loan-to-value (loan divided by value), debt service coverage (NOI divided by annual debt service) and debt yield (NOI divided by the loan). Each test produces a maximum loan; the lowest one is the loan, and the test that produced it is the one that "binds".
Written by the Titleman team with AI assistance (Claude). Reviewed by Titleman's SEO/GEO review desk (AI-assisted, not independent of Titleman) before it went live. Links checked and page updated 14 October 2026.
This page explains the arithmetic. It is not a lending policy or a credit decision; every lender sets its own limits in its term sheet.
The three tests, side by side
Each test answers a different question about the same property, so all three are run every time.
| Test | Formula | What it protects against | Example limit used below |
|---|---|---|---|
| Loan-to-value (LTV) | loan ÷ value | a fall in the value of the collateral | 65 percent maximum |
| Debt service coverage (DSCR) | NOI ÷ annual debt service | income too thin to pay the loan | 1.25x minimum |
| Debt yield | NOI ÷ loan | a loan too large for the income, whatever the rate | 10 percent minimum |
All three start from the same net operating income, so the first job is an NOI the lender will accept: in-place rents, a vacancy allowance and the expenses the owner really pays, not a pro forma.
Step by step
Sizing takes five steps, and the order matters only in that the NOI and the value must be settled before any test is run.
- Underwrite the NOI. Rent from the leases, a vacancy and credit allowance, operating expenses, reserves. See pro forma vs in-place NOI for the usual gap.
- Settle the value. An appraisal for the loan file, or an opinion of value at the screening stage.
- Work out the debt constant. The annual payment per dollar of loan at the quoted rate and amortization.
- Run each test for its maximum loan.
- LTV: value × maximum LTV.
- DSCR: (NOI ÷ minimum DSCR) ÷ debt constant.
- Debt yield: NOI ÷ minimum debt yield.
- Take the smallest, then check the other two ratios at that loan amount.
A worked example (illustrative figures)
None of these figures describes a real property or a real lender. They show the arithmetic, and every number can be recomputed from the ones before it.
A stabilized property has an underwritten NOI of 1,000,000 dollars and a value of 14,000,000 dollars (a 7.1 percent cap rate). The term sheet asks for a maximum LTV of 65 percent, a minimum DSCR of 1.25x and a minimum debt yield of 10 percent, at 6.50 percent interest on a 30-year amortization.
Debt constant. At 6.50 percent over 30 years the monthly payment is 632.07 dollars per 100,000 borrowed, so the annual debt constant is about 7.58 percent.
| Test | Calculation | Maximum loan |
|---|---|---|
| LTV | 14,000,000 × 65% | 9,100,000 |
| DSCR | (1,000,000 ÷ 1.25) ÷ 7.58% | about 10,550,000 |
| Debt yield | 1,000,000 ÷ 10% | 10,000,000 |
The loan is 9,100,000 dollars, and LTV binds. At that amount the DSCR is about 1.45x and the debt yield about 11.0 percent, both comfortably above the minimums.
Same income, lower cap rate. If the market values the same NOI at 18,000,000 dollars (a 5.6 percent cap rate), the LTV limit rises to 11,700,000 but the other two tests do not move: DSCR still allows about 10,550,000 and debt yield 10,000,000. Debt yield now binds at 10,000,000, an LTV of about 56 percent. This is why lenders add a debt yield test: a higher value does not create more income to pay the loan.
Rates up one point. At 7.50 percent the monthly payment is 699.21 dollars per 100,000, an annual constant of about 8.39 percent, and the DSCR test allows only about 9,530,000. On the 18,000,000 dollar value DSCR now binds, and the loan falls by about 465,000 dollars from 10,000,000. On the 14,000,000 dollar value LTV still binds at 9,100,000, with the DSCR down to about 1.31x.
What moves the result
The binding test changes with a handful of inputs, and each is worth checking in the term sheet before a number goes into a model.
- Interest-only periods. During interest-only months the payment is loan × rate, so the DSCR looks better than on an amortizing payment. Check which payment the lender sizes on.
- Rate stress. Some lenders size on a rate above the note rate or on a floor constant. The higher the sizing rate, the sooner DSCR binds.
- Construction loans use cost, not value. For a construction loan the lender looks at loan-to-cost and at the stabilized NOI it expects later.
- The NOI the lender accepts. Lenders often haircut income: a higher vacancy, a management fee even when the owner self-manages, reserves for replacements. A lower NOI moves the DSCR and debt yield limits by the same proportion.
- Supervisory ceilings. For US banks the interagency real estate lending guidelines set supervisory LTV limits of 65 percent for raw land, 75 percent for land development, 80 percent for commercial construction and 85 percent for improved property (12 CFR Part 365, Appendix A). A lender's own policy can be lower, and its term sheet states the limit it will use.
Beyond the three ratios, a lender also reads the sponsor (experience, liquidity, net worth), the lease rollover in the loan term and the reserves. Those decide whether the loan is made at all; the ratios decide how large it is. The general definitions are on Wikipedia for debt service coverage and loan-to-value.
Where Titleman fits
Titleman underwrites the property from the documents in the loan request. Send the offering memorandum, the rent roll and the T-12 to Underwriting and it returns an investment committee memo with the income built line by line, and the inputs your committee needs for the tests on this page: NOI, value evidence, coverage and debt yield, each with its source. On about half of runs an Excel model comes back too (31 of 62 finished runs in the 30 days to 12 October 2026, as the Underwriting guide records). How such a model is built and checked is in our teardown, and what a full package contains is in what's included in an underwriting package. The loan amount and the credit decision stay with the lender.
FAQ
How do lenders size a commercial real estate loan?
They run several tests on the same net operating income and lend the smallest amount that passes all of them. The usual three are loan-to-value (loan divided by value), debt service coverage (NOI divided by annual debt service) and debt yield (NOI divided by the loan). Each test gives a maximum loan; the lowest of the three is the loan.
Which test usually limits the loan?
It depends on the cap rate and the interest rate. When values are high relative to income, debt yield or DSCR binds before LTV. When rates rise, DSCR tightens because the same NOI covers less debt. In the worked example on this page a one point rise in the rate moved the binding test from debt yield to DSCR and cut the loan by about 465,000 dollars.
What is a debt constant?
The annual debt service per dollar of loan, including amortization. At 6.50 percent interest on a 30-year schedule it is about 7.58 percent; at 7.50 percent it is about 8.39 percent. Dividing the maximum debt service the DSCR test allows by the debt constant gives the largest loan that passes DSCR.
Is there a legal limit on loan-to-value?
For US banks there are supervisory limits, not hard caps: the interagency real estate lending guidelines list 65 percent for raw land, 75 percent for land development, 80 percent for commercial construction and 85 percent for improved property. A lender's own policy and term sheet can set lower limits.