Commercial real estate lenders use several metrics together because no single ratio captures the entire credit. Understanding what each metric measures helps a borrower anticipate proceeds and prepare a better financing request.
Net operating income (NOI)
NOI is property revenue minus operating expenses, before debt service, income taxes, depreciation, and owner-specific financing costs. Lenders commonly underwrite a normalized NOI that may differ from the seller's trailing statement.
- Effective gross revenue: $1,950,000
- Operating expenses: $560,000
- Illustrative NOI: $1,390,000
Debt service coverage ratio (DSCR)
DSCR compares underwritten NOI with annual principal and interest payments. A 1.30x DSCR means the property generates $1.30 of NOI for each $1.00 of annual debt service.
Because debt service changes with rate, amortization, and loan amount, DSCR is sensitive to the proposed financing structure.
Debt yield
Debt yield compares underwritten NOI directly with the loan amount. It does not depend on interest rate or amortization, which makes it useful for comparing leverage across structures.
For example, $1.2 million of underwritten NOI on a $12 million loan produces a 10% debt yield.
Loan-to-value (LTV)
LTV compares the loan with the lender's accepted property value. A $12 million loan on an $18.5 million value represents approximately 64.9% LTV.
The lender's value may be lower than the purchase price or the borrower's estimate, so final LTV can change after appraisal and underwriting.
Why all four matter
LTV addresses collateral leverage. DSCR addresses payment capacity. Debt yield addresses income relative to exposure. NOI is the operating foundation beneath both DSCR and debt yield. A lender normally tests the transaction against several constraints and sizes to the most conservative result.
Use the metrics as a connected system: validate NOI first, then test leverage, payment coverage, and income yield against the requested structure.
Educational content only. Financing terms and lender requirements vary by transaction and are subject to underwriting, due diligence, market conditions, and lender approval.