Debt yield is a financial metric used in commercial real estate lending to assess the risk of a loan. It is calculated by dividing the property’s net operating income (NOI) by the loan amount. The resulting figure represents the percentage of the loan that the property’s NOI can cover.

For example, if a property has an NOI of $500,000 and the loan amount is $5,000,000, the debt yield would be 10% ($500,000 ÷ $5,000,000 = 0.10 or 10%).

Debt yield is used by lenders as a way to measure the property’s ability to generate income relative to the size of the loan. A high debt yield indicates a lower risk of default, as the property is generating enough income to cover the loan payments. On the other hand, a low debt yield suggests a higher risk of default, as the property’s income may not be sufficient to cover the loan payments.

Lenders typically require a minimum debt yield for a loan to be considered, with the specific threshold varying depending on the lender and the property type.

When underwriting financing options in commercial real estate, debt yield can be used by lenders as a metric to assess the risk of a potential loan. Here are some steps you can take to use debt yield in your underwriting process: