💸 What Is Debt Yield & Why It Matters in CRE Financing 🏢

📊 Understanding Debt Yield: The Key Metric Every Lender Watches 👀

💡 Introduction

In commercial real estate (CRE) lending, few metrics carry as much weight as debt yield. Whether you’re an investor seeking financing or a broker structuring deals, understanding this metric is essential. Lenders rely on it to gauge the true risk of a loan — independent of market volatility or property appraisals.

🔍 What Is Debt Yield?

Debt yield is a measure of a property’s net operating income (NOI) relative to the total loan amount. It shows how quickly a lender can recoup their investment if they were to take ownership of the property.

Formula:

Example:
If a property generates $1,000,000 in NOI and the loan amount is $10,000,000, the debt yield is 10%.

This means that — ignoring all other factors — the lender would earn a 10% return on their investment from the property’s income alone.

💰 Why Do Lenders Care About Debt Yield?

Debt yield gives lenders a pure measure of risk. Unlike loan-to-value (LTV) or debt service coverage ratio (DSCR), it’s not influenced by appraisals or interest rates.

Here’s why lenders love it:

1.Objective Risk Assessment:
Debt yield focuses solely on the property’s income, providing a clear view of financial stability.

2.Market-Neutral Metric:
It doesn’t depend on changing property values or cap rates — making it consistent in volatile markets.

3.Default Recovery Insight:
A higher debt yield means lenders could recover their investment faster in a foreclosure situation.

4.Regulatory Benchmark:
Many lenders set minimum debt yield requirements (8–10%) for CRE loans, ensuring the property can sustain performance through downturns.

📈 Typical Debt Yield Benchmarks

·Conservative lenders (banks, life companies): 10–12% minimum

·Bridge or private lenders: 8–9% acceptable

·High leverage or value-add projects: May drop to 7–8% depending on exit plan

Debt yield requirements tighten as market uncertainty rises, which is why strong income-producing properties attract better financing terms.

🧩 Debt Yield vs. DSCR: What’s the Difference?

While both measure loan safety, DSCR focuses on monthly cash flow coverage (NOI ÷ Debt Service), while Debt Yield focuses on overall loan exposure (NOI ÷ Loan Amount).
Lenders use both to cross-check a deal’s health, but if one metric tells the truth in turbulent times — it’s debt yield.

🏦 The Medallion Funds Advantage

At Medallion Funds, we understand what lenders are really looking for. Our team structures deals to meet or exceed debt yield and DSCR thresholds — giving you access to better rates, higher leverage, and faster approvals across 600+ lenders.

📅 Schedule a strategy call today to see how we can optimize your next deal.
🔗 https://billrapponline.com

✅ Conclusion

Debt yield might sound like a technical metric, but it’s the heartbeat of every commercial real estate loan. By mastering it, investors and brokers alike can position their deals with confidence — and speak the language lenders respect most: risk-adjusted return.

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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory