Debt yield vs. DSCR: why three CRE loan tests can produce different proceeds

Finance explainer | Original worked example

A property can meet a lender's leverage limit and still support a smaller loan than its owner expects. The reason becomes clear when three measures are calculated together: debt yield, debt-service coverage ratio, or DSCR, and loan-to-value, or LTV.

In CRE News Today's hypothetical example, a $10 million property with $600,000 in annual underwritten income supports $6 million under the selected tests at a 6% interest rate. At 7%, the same tests support about $5.66 million. Neither the assumed property value nor its income changed. The payment calculation did.

This is a loan-sizing exercise, not an actual quote or a report of prevailing lending terms. All rates, values and thresholds below are deliberately chosen assumptions.

Three questions, three denominators

Debt yield divides annual net operating income, or NOI, by the loan amount. The OCC's Commercial Real Estate Lending handbook, page 43, describes it as a measure independent of interest rates, amortization and capitalization rates. In this example, $600,000 divided by $6 million equals 10%.

DSCR compares the income available for debt service with debt payments over the same period. Definitions matter: Fannie Mae's current glossary uses net cash flow and includes certain additional required financing payments. Our simplified example uses one senior loan and assumes the same $600,000 income numerator for coverage and debt yield.

LTV divides the loan by the property value used for that analysis. The interagency appraisal guidelines identify appraisals or evaluations as the basis for collateral value in lending. Here, the assumed value is $10 million; it is not an appraisal or an asking price for a real building.

Keep the units separate: DSCR is a multiple, while debt yield and LTV are percentages.

Start with the income the lender will use

The OCC handbook's income analysis and NOI definition, pages 42 and 140, distinguish underwritten property income from raw receipts. Vacancy assumptions, operating costs and replacement reserves matter; debt service is not deducted when calculating NOI. Covenant calculations can differ from underwriting calculations.

Before comparing two proposals, reconcile their income worksheets. A $600,000 figure in an owner's presentation and a $540,000 figure in a lender's analysis cannot be treated as interchangeable, even if both spreadsheets label the line "NOI."

A $10 million property under three hypothetical limits

Assume $600,000 of annual underwritten income, a $10 million value, a minimum 1.25x DSCR, a minimum 10% debt yield and a maximum 65% LTV. Payments are monthly, with principal and interest calculated over a 25-year amortization period. There is no subordinate debt.

The thresholds are illustrative choices, not regulatory limits, universal lender requirements or assurances of approval. For this exercise, the permitted loan must pass all three.

Two limits are immediate:

• Debt yield: $600,000 divided by 10% supports $6 million.
• LTV: $10 million multiplied by 65% supports $6.5 million.

For DSCR, divide $600,000 by 1.25. That allows $480,000 in annual principal and interest. Then calculate the loan that those payments support at each assumed rate.

Calculations: CRE News Today. Each row holds income, value, amortization and thresholds constant. Figures exclude closing costs, reserves and payoff obligations.

At 6%, debt yield is the binding test. At 7%, coverage takes over. A $6 million loan at 7% with this amortization requires about $508,881 in annual payments, producing approximately 1.18x coverage. That fails the assumed 1.25x test even though debt yield remains 10% and LTV remains 60%.

The reduction from $6 million to the calculated $5,659,476 is about $340,524. That is a financing gap relative to the assumed request, before considering other closing requirements.

Why interest-only payments do not settle the question

At 6% interest only, $480,000 of annual debt service would mathematically support $8 million. But the example's debt-yield and LTV limits still restrict the loan to $6 million. Changing the payment structure does not erase either constraint.

Actual underwriting may also test amortizing payments despite an interest-only period. The OCC handbook discusses this distinction on page 40. Ask which payment schedule and underwriting rate produced the lender's quoted coverage ratio.

A 25-year amortization schedule also does not establish a 25-year loan term. A shorter maturity can leave a balloon balance to repay or refinance.

Stress income separately from rates

Reduce assumed income by 10%, to $540,000, while keeping the 7% rate and $10 million value unchanged. The DSCR limit falls to about $5.09 million and the debt-yield limit falls to $5.4 million. LTV stays at $6.5 million in this deliberately isolated sensitivity.

The binding loan amount falls by about $565,948 from the original 7% case. In a real analysis, value could change too; holding it fixed here helps identify the effect of income alone.

That distinction makes a lender discussion more useful. Was the change caused by lower accepted income, a different payment schedule, a different value, or a tighter threshold? Each points to a different part of the underwriting file.

Turn the sizing result into a closing worksheet

Gross loan size is not cash available to the owner. Put the loan amount beside the existing payoff, any prepayment charge, lender and third-party costs, and required reserve deposits. Then identify the additional equity or remaining proceeds without counting the same deduction twice.

For example, $5.66 million of gross debt cannot retire a $6 million balance without another funding source, even before costs. A satisfactory LTV does not fill that shortfall.

Ask for the lender's income calculation, value basis, tested rate, amortization schedule and each applicable sizing threshold in one worksheet. Our worked example isolates three constraints; it does not replace the rest of credit approval.

For the wider preparation process, read Craig Hoebing's contributed perspective, Arizona CRE refinancing: five checks before a loan matures. To receive future explainers, join CRE News Today's newsletter.

Method: Monthly payments use the standard level-payment amortization formula. Annual debt service is 12 monthly payments; calculations retain unrounded values until presentation. This article contains original hypothetical calculations, not a property valuation, commitment or transaction recommendation. Sources were checked October 23, 2026.