What is Debt Yield in Real Estate?
Debt yield is a risk metric used by commercial real estate lenders to evaluate how quickly they could recover their loan from a property's income if the borrower defaults. It is calculated by dividing the property's net operating income (NOI) by the total loan amount. A higher debt yield means the lender has more income coverage relative to their loan exposure, which means lower risk.
How to calculate debt yield
Debt Yield = Net Operating Income / Loan Amount
Example: NOI of $150,000 / Loan of $1,500,000 = 10% debt yield
Why lenders use debt yield
Unlike DSCR (which depends on the interest rate and amortization schedule) or LTV (which depends on property valuation), debt yield is independent of loan terms and appraisal assumptions. It measures the raw income-producing capability of the property relative to the loan amount. This makes it a more objective measure of risk, especially in low interest rate environments where DSCR can look artificially strong.
Most CMBS lenders require a minimum debt yield of 8-10%. Banks and life insurance companies may accept 7-9%. The higher the debt yield, the more comfortable the lender is with the loan. Below 8%, most institutional lenders will not proceed.
Debt yield vs DSCR vs LTV
| Metric | Formula | What it measures | Depends on |
|---|---|---|---|
| Debt Yield | NOI / Loan Amount | Income vs loan exposure | NOI only |
| DSCR | NOI / Annual Debt Service | Ability to cover payments | NOI + loan terms |
| LTV | Loan Amount / Property Value | Leverage level | Appraisal |
For investors
Understanding debt yield helps you anticipate how lenders will size your loan. If you are acquiring a commercial property and the debt yield on your proposed loan amount falls below 8%, the lender will likely reduce the loan amount until the debt yield reaches their minimum threshold. This affects your required equity contribution and overall returns.