Commercial mortgage math
Debt yield asks how much NOI supports the loan itself
Debt yield compares normalized NOI directly with the mortgage amount. Because it does not depend on the interest rate or amortization, it gives a lender a financing-structure-independent view of how much property cash flow supports each dollar of debt.
Debt yield compares NOI with the outstanding or proposed loan amount
Debt yield = normalized annual NOI ÷ mortgage loan amount × 100. If a property produces $250,000 of normalized NOI and the proposed mortgage is $4,000,000, debt yield is 6.25%.
The interpretation is straightforward: the normalized annual property income equals 6.25% of the loan balance. Unlike DSCR, the result does not change merely because the lender changes the interest rate or amortization.
Use the NOI Calculator if the numerator still needs to be normalized, then put NOI and loan amount into the Debt Yield Calculator rather than doing repeated division by hand.
Debt yield removes financing terms from the first layer of the cash-flow test
DSCR can improve if the same loan is stretched over a longer amortization or priced at a lower rate. Debt yield does not. The numerator is property NOI and the denominator is the debt itself, so it gives another view of leverage supported by property cash flow.
That does not make debt yield superior to DSCR. It answers a different question. Strong commercial underwriting can use several measures because each exposes a different risk.
Debt yield exposes leverage supported by property income without letting financing terms improve the answer
Suppose two lenders look at the same $4 million loan and the same $250,000 NOI. One offers a lower rate and longer amortization, so its DSCR may look much better. Debt yield remains 6.25% under both structures because neither NOI nor loan amount changed.
That makes debt yield useful as a second lens when a deal appears to work only because the payment has been stretched. It does not replace DSCR; it simply prevents rate and amortization from hiding how much debt sits behind each dollar of property income.
A borrower can use the Debt Yield Calculator to test the proposed debt, then use the DSCR Calculator to see whether the actual payment structure also works.
Worked example: $250,000 NOI on a $4 million loan
$250,000 ÷ $4,000,000 = 0.0625, or 6.25% debt yield. If the property NOI remains unchanged but the loan rises to $4.5 million, debt yield falls to about 5.56%. If the loan falls to $3.5 million, it rises to about 7.14%.
The sensitivity is useful because it shows, immediately, the effect of adding or removing debt without changing the property's operations.
| Loan amount | NOI | Debt yield |
|---|---|---|
| $3,500,000 | $250,000 | 7.14% |
| $4,000,000 | $250,000 | 6.25% |
| $4,500,000 | $250,000 | 5.56% |
If a lender uses a debt-yield target, the formula can estimate a maximum loan
Rearrange the formula: maximum loan = normalized NOI ÷ required debt yield. If NOI is $250,000 and, purely as an illustration, a lender required 7.00%, the debt-yield-derived loan would be about $3.57 million.
That amount is only one constraint. The actual maximum can be lower because of DSCR, LTV, property type, borrower strength or other lender policy. Use the Debt Yield Calculator beside the formula to test several loan amounts quickly.
Debt yield is only as reliable as the NOI used in the numerator
An aggressive NOI can make debt yield look stronger than the property truly is. Normalize rent, vacancy and operating expenses before relying on the percentage.
For example, if $250,000 NOI falls 10% to $225,000 on a $4 million loan, debt yield falls from 6.25% to 5.625%. Use the NOI Calculator and test a downside case rather than presenting one optimistic ratio.
Debt yield, DSCR, LTV and cap rate use similar numbers but answer different questions
These ratios should not be substituted for one another. Debt yield uses NOI ÷ loan. DSCR uses NOI ÷ annual debt service. Cap rate uses NOI ÷ value. LTV uses loan ÷ value.
Together they connect cash flow, financing and value from different directions.
| Metric | Formula | Main question |
|---|---|---|
| Debt yield | NOI ÷ loan | How much property income supports each dollar of debt? |
| DSCR | NOI ÷ annual debt service | Can qualifying cash flow cover the scheduled debt payments? |
| Cap rate | NOI ÷ property value | How does property income relate to value? |
| LTV | Loan ÷ property value | How leveraged is the property? |
Debt yield is not the mortgage interest rate and not the investor's return
A 6.25% debt yield does not mean the mortgage rate is 6.25%, nor does it tell the investor's return on equity. It is a lender-facing relationship between normalized NOI and the amount of debt.
Keeping these measures separate prevents a common commercial-mortgage mistake: using one percentage because it happens to look similar to another.
Use debt yield as one independent check in a commercial financing model
- Normalize NOI and document the assumptions.
- Divide NOI by the proposed loan amount.
- Recalculate with lower NOI and alternative loan amounts.
- Compare the result with the actual lender/program requirement rather than a generic internet benchmark.
- Then test DSCR, LTV, property quality and sponsor strength.
- Use the Debt Yield Calculator to reproduce the math.
Sources and methodology
Sources and verification
Debt-yield targets are lender- and transaction-specific. This page explains the mathematics and underwriting purpose without presenting any one percentage as a universal Canadian rule.