Every CRE loan is sized by three constraints — DSCR, debt yield, and LTV — and the loan amount is whichever one produces the smallest number. Borrowers tend to think in LTV; lenders increasingly think in debt yield; committees live on DSCR. Understanding what each metric protects against, and which one binds on a given deal, is the core mechanic of loan sizing.
Debt service coverage ratio is underwritten NOI divided by annual debt service. At 1.25x, the property generates 25% more cash than the loan requires — the cushion that absorbs a lost tenant or a soft quarter before the lender feels it. Typical minimums run 1.20x–1.25x for stabilized multifamily and 1.25x–1.40x for other asset classes, tested at the underwritten rate and often re-tested at a stressed rate. DSCR’s weakness: it moves with the loan’s own terms. Cheap debt, a long amortization, or an interest-only period all flatter coverage without changing the property at all — which is exactly why lenders added a second metric.
Debt yield is underwritten NOI divided by loan amount — no rate, no amortization, no structure. A $10M loan on $900K of NOI is a 9% debt yield no matter how the payments are engineered. It answers the recovery question directly: if the lender takes the property back, what return does the collateral produce on the dollars out the door? Because it cannot be flattered by loan terms, debt yield has become the discipline metric, especially for bridge and floating-rate lending. Common floors run 8%–10% depending on asset class and market — lower for institutional multifamily, higher for hotels and specialty assets.
Loan-to-value is loan amount over appraised value; loan-to-cost, used on construction and heavy value-add deals, is loan amount over total project cost. Both measure the equity cushion that absorbs loss before the lender does — at 65% LTV, value must fall 35% before principal is impaired. The weakness is the denominator: value is an opinion, and cap-rate-driven opinions move with the market. LTC is harder to argue with, which is why construction lenders size on cost and take value as the upside case, typically capping LTC at 75%–85% and testing the resulting loan against stabilized value too.
Run all three and take the smallest loan. A worked example: multifamily acquisition, $1.0M underwritten NOI, $14.5M purchase price, 6.5% rate, 30-year amortization, and a credit box of 1.25x DSCR minimum, 9% debt yield floor, 70% LTV maximum. The DSCR constraint supports roughly $10.5M of debt service capacity; the debt yield floor caps the loan at $11.1M ($1.0M ÷ 9%); the LTV cap allows $10.2M. LTV binds; the loan is $10.2M. Drop the same deal into a higher-cap-rate market where the appraisal comes in at $13M and the LTV constraint tightens to $9.1M — same property, same NOI, different binding constraint. In practice: in low-cap-rate environments debt yield usually binds; in high-rate environments DSCR does; LTV binds when values run ahead of income.
The metrics answer different failure modes, which is why a credit file needs all of them. DSCR protects against a payment default while the borrower owns the property. Debt yield protects the lender’s basis if it becomes the owner. LTV/LTC measures how much market movement the equity absorbs first. A file can pass two and fail the third — 1.40x coverage at 80% LTV is a thin-equity deal wearing good coverage — and the credit memo should show all three at the underwritten case and under stress: rate shocks against DSCR, exit cap expansion against LTV, both against the refinance test on transitional deals. Global versions of the same questions get answered at the borrower level through global cash flow analysis.
This is the math at the center of every file we underwrite for lending clients: normalized NOI, all three constraints, the binding one identified, and the stress cases shown — packaged with the model so your credit team can audit every number. See the sample deal underwriting & debt sizing memo, or the full outsourced CRE underwriting for lenders service.
15 minutes to discuss your deal, your file, or your portfolio. Honest assessment of fit — and if we’re not the right firm, we’ll tell you.
Schedule a ConsultationNo commitment. No pressure. Just a straight conversation.