What debt yield measures
Debt yield asks a blunt question: if the lender took the property back tomorrow, what return would the NOI produce on the loan balance? $900,000 of NOI on a $10,000,000 loan is a 9% debt yield. Unlike DSCR it does not change when the interest rate or amortization changes, and unlike LTV it does not depend on an appraisal.
The measure became a standard sizing test because low interest rates and long interest-only periods can make DSCR look comfortable while the loan balance is high relative to income.
How to read the result
A higher debt yield means more income per dollar of loan and a smaller loan relative to the cash flow. Lenders set minimum debt yields by property type and market, and the loan amount that satisfies the minimum is simply NOI divided by that minimum.
Debt yield and cap rate share a numerator. If the cap rate is 6% and the debt yield is 9%, the loan is two-thirds of value, which is 67% LTV. The three measures are linked, and a quick cross-check catches inconsistent assumptions.
Limitations
The test depends entirely on NOI. On a transitional property with in-place income below the stabilized level, debt yield on current NOI can look weak even when the plan is sound. Bridge lenders often evaluate both in-place and stabilized debt yield for that reason.
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