Debt
DSCR, LTV and Debt Yield: Which One Actually Binds
Lenders size a loan three ways and lend the smallest. Knowing which test is binding tells you what to negotiate.
Borrowers tend to think of loan sizing as a single number, seventy percent of value, say. Lenders do not. They run three tests and lend the smallest result. Knowing which one is binding on your deal tells you what is worth negotiating and what is not.
The three tests
Loan to value caps the loan against the collateral. Straightforward, and the one everyone quotes.
Debt service coverage caps the loan against the income. Net operating income divided by annual debt service must exceed a floor, commonly 1.25 times on stabilized commercial, 1.20 on multifamily, 1.30 to 1.40 on riskier property types. Because it works off the payment, this test tightens as rates rise even when nothing about the property has changed.
Debt yield caps the loan against the income without reference to rate or amortization at all. It is net operating income divided by the loan amount, and it answers a blunt question: what return would the lender earn if it took the keys tomorrow? Ten percent is a common floor. It became standard after 2008 precisely because a low interest rate cannot flatter it.
Why it matters which one binds
If LTV binds, you are constrained by the appraisal, and the lever is the valuation or the equity check. If DSCR binds, you are constrained by the payment, and an interest-only period, a longer amortization or a lower rate all move the number. If debt yield binds, nothing about the loan structure helps at all. Only more income or a smaller loan will do it, because the test ignores structure by design.
Most borrowers negotiate rate. On a DSCR-bound deal that is right. On a debt-yield-bound deal it is wasted effort.
The loan constant, briefly
One more number worth carrying: annual debt service divided by the loan. If your cap rate sits above the loan constant, leverage lifts your return. If it sits below, leverage drags it down, which is the situation on a great many deals at current rates, and the reason cash-on-cash returns keep coming in beneath the going-in cap.
See all three at once: Loan sizing model names the binding constraint, and Debt coverage shows debt yield and loan constant alongside DSCR.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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