Debt yield
Debt yield is the ratio of net operating income (NOI) to debt, calculated by dividing NOI by the loan amount and expressing the result as a percent. Federal Reserve Bank of New York staff research defines debt yield in these terms: NOI divided by loan balance. Lower debt yields indicate higher leverage on the same NOI.
Debt yield on bank CRE desks
CRE underwriting desks use debt yield alongside debt service coverage ratio (DSCR) and LTV when sizing permanent, bridge and conduit facilities. OCC's CRE handbook lists debt yield among the metrics used in value analysis for income-producing CRE loans, alongside DSCR and LTV; it is especially useful when low interest rates and compressed capitalisation rates would otherwise support large loan amounts on DSCR and LTV alone. Desks typically set higher debt-yield floors for riskier property types and use stressed or normalised debt-yield hurdles to size loans that remain viable if rates rise.
Because the metric does not depend on coupon or amortisation elections, it is less sensitive to interest-only structuring than DSCR. It also does not depend on appraisal value, which distinguishes it from LTV when valuations are contested or volatile.
Calculation and relationship to value
The calculation:
- Numerator: property NOI
- Denominator: loan amount
- Result: percent yield of NOI on the debt
Federal Reserve Bank of New York staff research using supervisory CRE data links debt yield mechanically to capitalisation: substituting the perpetuity valuation formula into LTV yields debt yield equal to cap rate divided by LTV. On that identity, debt yield below the prevailing cap rate implies LTV above 100 percent on an income-capitalisation basis. The same research treats low debt yield as a loan-level distress indicator, using a debt yield below 8% as a distress marker, because NOI then covers a thinner share of the outstanding balance.
Distinctions from DSCR and interest coverage
Debt yield is a leverage-on-NOI test. Interest coverage and DSCR measure coverage of interest or full debt service and therefore move with rate and amortisation assumptions. Debt yield holds loan size to a rate-agnostic floor. It should be considered alongside other underwriting criteria and loan terms rather than in isolation. Desks therefore read debt yield, DSCR, LTV and property-type risk together when setting covenants, cash-management triggers and refinance tests.