Debt yield is the cap rate divided by the loan to value. That is an identity, not an approximation: NOI over loan is NOI over value divided by loan over value. Read it backwards and it is the fact that catches people out. At a fixed floor, a low cap rate property cannot be levered far, however comfortable the coverage looks.
| Going-in cap rate, divided by loan to value | 6.00% over 63.00% | 9.52% |
|---|---|---|
| NOI divided by the loan | $600,000 over $6,300,000 | 9.52% |
The same $600,000 of income against the floors a credit officer commonly tests. These are conventional levels rather than a quote: where a floor lands moves with credit conditions, asset class, and lender, and the one that governs your deal is on your term sheet.
| Debt yield floor | Largest loan it allows | Against your $6,300,000 | Loan to value there |
|---|---|---|---|
| 8.00% | $7,500,000 | $1,200,000 of room | 75.0% |
| 9.00% | $6,666,667 | $366,667 of room | 66.7% |
| 10.00%Fails | $6,000,000 | Short by $300,000 | 60.0% |
| 11.00%Fails | $5,454,545 | Short by $845,455 | 54.5% |
Debt yield uses the lender's NOI, not the marketed one, and the whole loan, not the funded portion. It is one of three tests: a lender also caps the loan against value and against coverage, and funds the smallest of the three answers. Which one binds is the useful fact, and it is not visible from this test alone.
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A debt yield is one division on one NOI. Building that NOI out of a rent roll and a T-12, and running all three lender tests against it, is the underwriting. Altyst reads the documents and does that part.