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Debt yield calculator

Debt yield is a year of cash flow divided by the loan. It ignores the rate, the amortization and the cap rate, which is why some lenders use it to size a loan.

By Research desk, The Lender Report ·Sources reviewed

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For a property, its net operating income.

A lender's minimum, if it uses one.

Adds the value and the loan to value that go with this debt yield.

JavaScript is off, so the form cannot calculate. The worked example below shows the same arithmetic for sample numbers, and the formula is written out under it.

A worked example

Cash flow $412,000, loan $3,500,000, a 10.0% test and an 8.0% cap rate. Example numbers.

Loan at a 10.00% debt yield
$4,120,000
Your loan is within it.
Value at a 8.00% cap rate
$5,150,000
Loan to that value
68.0%
Debt yield equals the cap rate divided by this ratio.
Debt yield
11.77%

Now change only the rate. On a 25-year amortization the same loan covers 1.68x at 5 percent and 1.27x at 8 percent. Its debt yield is 11.77% at both. That is the point of the measure: it does not move when rates do.

The formula

Debt yield is the cash flow divided by the loan, as a percentage. A loan of $3,500,000 against $412,000 of cash flow is a 11.77% debt yield.

It ties to two other ratios. If value is cash flow divided by the cap rate, then debt yield equals the cap rate divided by loan to value. At an 8.0% cap rate and a 68.0% loan to value, the debt yield is 11.77%. A lender that holds loan to value fixed and sees cap rates fall will see the debt yield on the same loan fall with them.

Who asks for it

Neither SBA's SOP 50 10 8.1 nor the interagency real estate lending standards use debt yield at all. Where a lender uses it, the minimum is that lender's own policy, and it is not published. Ask which cash flow it divides, whether the lender's or the owner's, because that choice moves the ratio as much as the loan does.

Using it well

  1. Use it as a floor on the loan. It says the largest loan the cash flow supports at a given yield, whatever the rate. That is the number in the first row of the result.
  2. Read it with coverage. Coverage tells you whether the payment is covered at today's rate. Debt yield tells you whether the loan is large relative to the income if the rate or the cap rate moves.
  3. Check which cash flow. A lender that underwrites lower cash flow than the owner reports will show a lower debt yield for the same loan.

In the data here

No public file carries a debt yield. You can compute it for a deal you are working on, as here. For lenders, the lender page shows what each holds in non-owner-occupied commercial real estate and the loan size history the call report gives, which is where to start finding lenders at your size.

Terms used here

  • Debt yield: 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.
  • 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-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.

Sources

  1. SBA SOP 50 10 8.1, Lender and Development Company Loan Programs (sets coverage tests, no debt yield test), effective .
  2. 12 CFR part 365, Appendix A, Interagency Guidelines for Real Estate Lending Policies (names coverage standards for each bank to set in its own policy and does not mention debt yield), current as of .

Next step: check the record

Keep reading

  • 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.

Estimate from your inputs. Not a quote or advice about which loan to take. Another tool: all calculators.