DSCR, debt yield and LTV: three constraints that can size a CRE loan

Start with three separate questions

A commercial real estate loan request should explain how the property supports payments, how much income stands behind the principal balance, and how the debt compares with collateral value. Debt-service coverage ratio (DSCR), debt yield and loan-to-value (LTV) address those questions. They do not replace the rest of underwriting.

For an income-producing property, the OCC’s CRE lending handbook defines DSCR using cash flow or net operating income divided by debt service, debt yield as net operating income divided by debt, and LTV as credit relative to collateral value. The handbook is guidance for bank supervision; it is not a set of Duke loan terms.

Put the inputs on the same footing

Label the income period, valuation date and payment assumptions before comparing results. Net operating income (NOI) means property operating income after operating expenses, before debt service. A forecast and a trailing operating statement answer different questions. Keep them separate rather than selecting whichever supports the larger request.

Ask the reviewer to identify the income accepted for sizing. Record whether the proposed debt service is interest-only or amortizing, and whether the calculation uses the proposed payment or a stressed payment. A ratio without its inputs is difficult to evaluate.

Translate the tests into loan capacity

The following relationships are algebra, not quoted program requirements. The minimums and maximums must come from the capital source reviewing the transaction.

• Under a DSCR test, allowable annual debt service equals accepted annual NOI divided by the required DSCR. Convert that payment capacity into principal using the applicable payment structure.
• Under a debt-yield test, principal capacity equals accepted annual NOI divided by the required debt yield, expressed as a decimal.
• Under an LTV test, principal capacity equals accepted collateral value multiplied by the permitted LTV, expressed as a decimal.

When all three are binding conditions, the request must fit the lowest resulting capacity. That is a mathematical ceiling under those assumptions, not an approval or a commitment to lend.

Diagnose the constraint before changing the request

Consider an educational scenario in which value supports the requested debt but income does not support its payment. A higher valuation alone cannot repair that payment shortfall. The useful conversation is about accepted income, payment structure, requested principal and additional equity.

Conversely, a payment adjustment may improve DSCR while leaving debt yield unchanged, because the debt-yield calculation has no payment input. Keep that distinction visible when comparing proposals. Do not assume one favorable ratio cancels another condition.

Write down the assumption that would have to change, the evidence supporting that change, and the consequence if it does not occur. This makes a scenario review more useful than a single maximum-loan figure.

Bring the sizing question to the right financing path

Start with Duke’s [Commercial Real Estate financing approach](/commercial-real-estate/). For a multifamily property, the [bank, agency and bridge financing discussion](/insights/multifamily-bank-agency-bridge-financing/) adds context about selecting a capital channel.

For an initial discussion, organize the property description, operating information, tenancy, requested proceeds and business plan. Duke can help frame the financing question and evaluate the structure. The reviewing capital source determines its own conditions and decision.