Net operating income divided by the loan amount, shown as a percent. It measures how much income stands behind each dollar lent, whatever the rate or term.
Debt yield is net operating income divided by the loan amount, expressed as a percent. The OCC’s handbook for examiners points out what sets it apart: it does not depend on the interest rate, the amortization period or the cap rate. A low rate or a long interest-only period can lift a coverage ratio, and a low cap rate can lift an appraised value, but neither changes debt yield.
Example: net operating income of $150,000 on a $1,500,000 loan is a debt yield of 10 percent. Raise the loan to $2,000,000 on the same income and the debt yield falls to 7.5 percent.
The handbook reads the number this way: a lower debt yield means more debt against the same income, and a lender may want a higher debt yield on a property type it sees as riskier. There is no public standard floor. Each lender sets its own, and many bank and credit union lenders size on coverage and loan to value and do not use debt yield at all, so ask.
How it shows up in the data here
Not in any public file. No filing here records the debt yield on a loan or the floor a lender uses. Run your own number in the debt yield calculator and ask the lender whether it sizes loans on debt yield, on coverage, or on both.
Go further
- Debt yield calculator: Debt yield from income and loan amount, and the loan a target yield supports.
- Debt yield calculator: Cash flow over the loan. The one ratio that ignores the rate, the amortization and the cap rate.
- Maximum loan calculator: The loan each test allows: DSCR, LTV and debt yield side by side, and which one binds.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Net operating income (NOI): A property's annual income minus its operating expenses, before loan payments, income taxes and depreciation. It is the top number in DSCR and debt yield.
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Loan-to-value ratio (LTV): The loan amount divided by the value of the property securing it. A $700,000 loan on a property valued at $1,000,000 is 70 percent loan to value.
- Capitalization rate (cap rate): A property's stabilized net operating income divided by its price or value. Divide income by the cap rate and you get an estimate of value.
- Loan constant: One year of loan payments divided by the loan amount, shown as a percent. It folds the interest rate and the amortization period into a single number.
- CMBS conduit loan: A commercial property loan made to be pooled with other loans and sold to investors as commercial mortgage-backed securities, not kept by the lender that made it.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.