CRE Debt Metrics: LTV, DSCR and Debt Yield

Before a bank or debt fund lends against a commercial building, it checks three ratios that each answer a different question about the loan's safety, because no single number captures all the ways a commercial mortgage can go wrong.

Loan-to-value: how much cushion if the property is sold

Loan-to-value (LTV) is the loan amount divided by the property's appraised value, and it answers "how much would property values have to fall before the lender's collateral is worth less than the loan?" A $70 million loan against a $100 million building is 70% LTV, meaning the lender has a 30% cushion — property values would need to drop by more than that before the loan is genuinely underwater. Most commercial mortgage lenders cap LTV somewhere in the 60–75% range specifically to preserve that cushion.

Debt service coverage ratio: can the rent actually pay the loan

Debt service coverage ratio (DSCR) is net operating income divided by the annual loan payment (principal and interest), and it answers a completely different question: "does the building's actual rental income cover what's owed on the loan, with room to spare?" A DSCR of 1.0 means the rent exactly covers the loan payment with nothing left over — an unacceptably thin margin, since any vacancy or expense spike would put the loan into default. Lenders typically require a DSCR of at least 1.20–1.25, meaning income needs to cover the loan payment with 20–25% headroom.

Debt yield: the lender's own stress test

Debt yield is net operating income divided by the loan amount itself (not the property value), and it's the metric lenders lean on hardest precisely because it doesn't rely on an appraisal that could be optimistic or stale. It answers "if this loan defaulted today and the lender had to take the property back, what yield would the income alone represent against what's owed?" A debt yield of 10% or higher is generally considered comfortable; lenders got badly burned in the 2008 crisis by loans that looked fine on LTV and DSCR using rosy appraised values and pro-forma income projections, and debt yield became popular afterward as a check that strips out both of those potentially optimistic assumptions.

For example, a building generating $6 million of net operating income, appraised at $100 million, borrows $65 million at a rate implying $4.5 million of annual debt service. LTV is 65% (comfortable cushion), DSCR is 1.33 ($6m / $4.5m, healthy headroom), and debt yield is 9.2% ($6m / $65m) — all three checks pass, giving the lender three independent reasons for comfort rather than relying on any single assumption holding up.