The Importance of Debt Yield in Commercial Property Loans

What is Debt Yield In Commercial Property Loans?

Debt yield is a measure of risk for commercial mortgage lenders. It takes into account the net operating income of a commercial property to determine how quickly the lender could recoup their funds in the event of default. Some lenders prefer this method to other ways of measuring loan risk, which might be obscured by low interest rates or lengthy amortization terms. You can calculate debt yield by using the following formula:

debtyieldformula

To calculate the debt yield, divide the net operating income of a building by the loan amount, and multiply by 100 to arrive at a percentage. So, for example, a property with a net operating income of $500,000 that requests a loan of $5,000,000 would have a debt yield of $500,000 / $5,000,000 x 100 = 10%.

Unlike other measures of loan risk, like debt-service coverage ratio (DSCR) and loan-to-value ratio (LTV), debt yield stays the same. DSCR can be reduced by a longer amortization period, and LTV can be subject to changes in the market that vary the assessed value of properties.


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