Debt Yield

Debt yield is a property's net operating income divided by the loan amount. It shows the return a lender would earn on its money if it took over the property on day one and lived off the property's current income.

The formula in words: debt yield equals net operating income (NOI) divided by the loan amount, shown as a percentage.

Worked example. An apartment building produces NOI of $100,000 a year. The proposed loan is $1,000,000. Debt yield = $100,000 ÷ $1,000,000 = 10%. If the lender had to take the building back, the property's income would pay it 10% a year on the loan amount, before any sale costs.

Debt yield can also size a loan. If a lender requires at least 10% and the property's NOI is $100,000, the largest loan it will make is $100,000 ÷ 10% = $1,000,000.

Why it matters for lenders

Debt yield is simple and hard to game. Two other common tests depend on market inputs. The debt service coverage ratio (DSCR) depends on the interest rate and the amortization period. Loan-to-value (LTV) depends on the appraised value, which depends on the capitalization rate (cap rate) the appraiser picks.

When interest rates and cap rates are low, a property can show strong DSCR and LTV for a loan that becomes too large once rates rise. Debt yield ignores the rate, the amortization period and the cap rate. It looks only at income and the loan amount.

US bank examiners describe debt yield as a quick, common way to size up a loan's risk, where a lower debt yield means higher leverage. They recommend higher debt yields for riskier property types. They also say it should be used alongside sound DSCR and LTV ratios, not instead of them. Minimums vary by property type and market, so there is no single standard number.

How it works in practice

A lender reviews a refinance on a fully leased shopping center. At today's rates, DSCR looks fine, and the appraisal supports the requested amount at an acceptable LTV. But the debt yield is only 7%, below the lender's policy floor for retail.

The underwriter flags the gap in the credit memo. If rates are higher when the loan matures, the borrower may not be able to refinance this amount anywhere. The committee approves a smaller loan that meets the debt yield floor.

Later, if a major tenant leaves, NOI falls and the debt yield drops with it. Lenders that track debt yield in their annual reviews catch this early. When NOI is updated on the loan record each year, the system can recompute debt yield, DSCR and LTV together and flag any that cross a limit.