Debt yield is a property's net operating income divided by the loan amount. A loan of 10,000,000 on a property with 900,000 of NOI has a debt yield of 9 percent.
It answers a lender's simplest question: if I had to take this property back, what annual income would I be holding against every dollar I lent?
How it is calculated
Debt yield = NOI ÷ loan amount. Unlike DSCR and loan-to-value, it does not depend on the interest rate, the amortization or the cap rate used to value the property. That is why lenders like it: a long amortization or a low rate cannot make a risky loan look safer.
How it sits next to DSCR and LTV
- DSCR tests whether income covers the payment. It depends on the rate and the amortization.
- Loan-to-value tests the loan against an appraised value, which depends on a cap rate assumption.
- Debt yield tests the loan against income alone.
A loan can pass DSCR and LTV in a low-rate market and still show a thin debt yield. Lenders often set a minimum on all three.
Typical levels
Minimums vary with property type, market and lender, and they move with the cycle. Figures in the high single digits to low double digits are common reference points in commercial lending, but a term sheet is the only source for a particular loan.
What to watch
As with every income-based measure, the NOI used decides the answer. A borrower's NOI and a lender's underwritten NOI for the same building can differ by a large margin, and the debt yield moves by the same proportion.