Commercial Debt Yield

Debt yield = normalized NOI ÷ commercial loan amount × 100. If a property produces $300,000 NOI and carries a $4,000,000 loan, its debt yield is 7.50%.

Unlike DSCR, the denominator is principal rather than mortgage payment. A lower interest rate or longer amortization therefore does not improve debt yield unless the principal itself changes.

Two mortgages for the same principal can have different DSCR because their rates and amortizations create different payments. Debt yield stays the same if NOI and principal are unchanged.

This makes it useful when a long amortization makes payment coverage look unusually strong or short-term interest-only financing makes current debt service look light relative to the amount advanced.

The metrics share a numerator only when the same normalized NOI is used. Their denominators create their meaning: debt service for DSCR, loan principal for debt yield and property value for cap rate.

A strong cap rate does not guarantee acceptable debt yield if leverage is high, and strong DSCR does not guarantee acceptable debt yield if favourable financing terms are masking a large principal balance.

If cap rate uses the same NOI and value used for LTV, then debt yield = cap rate ÷ LTV when both percentages are expressed consistently. This is a mathematical identity, not a lender policy.

A 5.00% cap rate financed at 70% LTV has an implied debt yield of about 7.14%. Pushing leverage higher therefore reduces debt yield when income and value stay unchanged.

If a lender uses a specific minimum debt yield, maximum principal = normalized NOI ÷ required debt yield. At $300,000 NOI and an illustrative 7.5% requirement, the debt-yield-based principal would be $4,000,000.

That is only one ceiling. DSCR, LTV, liquidity, property condition or another policy requirement can support a smaller amount.

With a $4,000,000 mortgage and $300,000 NOI, debt yield is 7.50%. If NOI falls to $270,000 while principal stays $4,000,000, debt yield falls to 6.75%.

The principal exposure does not automatically shrink because rents weakened. The metric therefore highlights the risk of assuming peak income will persist.

An interest-only bridge loan can show comfortable current payment coverage while principal remains large. Debt yield provides a separate view of how much in-place or stabilized property income supports that principal.

As-is and stabilized debt yields are different measurements. The future version depends on the credibility of the renovation, leasing and stabilization assumptions.

Lenders can use different debt-yield expectations by property type, market, leverage and risk, and some emphasize it more heavily than others. A percentage from one term sheet or a foreign market should not be converted into an industry-wide Canadian rule.

The useful purpose of the metric is to show whether principal has become aggressive relative to sustainable property income.

A strong debt yield does not prove what the property is worth. Commercial value depends on market evidence, highest and best use, lease quality, cap rates and other appraisal considerations. Debt yield also says nothing about environmental or physical impairment.

Use Commercial Appraisals and Commercial LTV for the collateral side.

Use Commercial Debt Yield Math for concise calculations and sensitivity. This underwriting page owns why the metric exists, what NOI belongs in it and how it interacts with leverage and other commercial tests.