ONEDEAL EDUCATIONAL GUIDE
Editorial standards · Calculation methods
Hypothetical commercial loan comparison
- Annual NOI
- $50,000
- Loan principal
- $500,000
- Annual debt service, scenario A
- $40,000
- Annual debt service, scenario B
- $45,000
Debt yield is 10% in both cases. DSCR changes from 1.25 to approximately 1.11.
Use the right denominator
The OCC’s commercial real estate handbook defines debt yield as NOI divided by the loan amount. Its DSCR measure divides NOI by annual debt service. Debt yield therefore does not change just because the interest rate or amortization changes; DSCR can. The handbook treats these measures as complementary to LTV and other underwriting criteria.
In the example, $50,000 divided by $500,000 is 10%. Dividing that same income by $40,000 of yearly payments gives 1.25. If payments rise to $45,000 while income and principal stay fixed, coverage falls to about 1.11. The building has not suddenly become more profitable because one ratio stayed unchanged.
Size a loan against an explicit target
Using an illustrative 10% target, $50,000 of NOI supports $500,000 under that constraint alone. At a 12% target, the amount falls to about $416,667. Neither target is a claim about current lender requirements. Enter the actual lender’s target when one is available.
A target-based loan limit is not a commitment. A lower appraisal, separate LTV limit or a different income adjustment can produce a smaller approved balance. Ask for the lender’s written calculation rather than averaging incompatible limits.
Stress the income before the financing
Reduce this example’s NOI by 10% to $45,000. Debt yield falls to 9%, and the loan supported at a 10% target falls to $450,000. That creates a $50,000 gap relative to the original loan request. Decide how that gap would be funded before assuming a refinance will close.
- Keep annual NOI and annual debt service on the same period.
- Confirm whether the lender deducts replacement reserves from its chosen income measure.
- Use the same NOI definition when comparing offers.
- Review cash flow after debt separately; debt yield is not cash-on-cash return.
Sources and method
Worked examples use the stated hypothetical assumptions. Source links support the general definitions and rules; they do not verify a specific product, offer or individual outcome.
Examples are educational estimates, not current product offers, approvals or individualized investment, tax, insurance or legal advice. Confirm current terms and rules for your circumstances.