The NOI will be determined based on a property’s proforma and the DSCR will be based on a bank’s internal credit policy requirements and underwriting process. The Debt Service Coverage Ratio (DSCR) is a property’s net operating income divided by the annual debt service for a loan. Debt Service Coverage Ratio (DSCR)Ĭommercial mortgage lenders will also use the debt service coverage ratio is determine a commercial mortgage amount. However, the minimum debt yield is typically 10%. The minimum debt yield can vary by property type and lender. The debt yield gives the lender a measure of risk that is independent of the interest rate, amortization period, and market value. For example, if the annual debt service on a loan was 100,000 and the loan amount was 1,000,000, then the debt yield would be 100,000/1,000,000 or 10%. The debt yield is the ratio of annual debt service divided by the loan amount. Debt YieldĪnother method commercial lenders will use to determine calculate a commercial mortgage loan amount is the debt yield. This market based cap rate is what the lender would use as the underwritten cap rate for a property. For example, if the NOI for a property was 100,000 and the market based cap rate was 5%, then the property’s value would be 100,000/0.05, or 2,000,000. So, the appraiser will figure out what the net operating income is for a property and then apply a market based capitalization rate to determine the property’s value. The cap rate is the ratio of net operating income to the property’s value. The commercial real estate appraiser will come up with a market based cap rate that determines the property’s value. The value of a property is determined by a bank ordered commercial real estate appraisal. That means that if the value of a property is 1,200,000, then the maximum loan amount the bank could extend using the LTV method would be 1,200,000 x 75%, or 900,000. For example, the maximum LTV for an office building could be 75%. For example, if the value of a property is 1,000,000 and the loan amount is 800,000, then the loan to value ratio would be 800,000/1,000,000, or 80%.Ī banks internal credit policy will define the maximum loan to value ratio that a loan cannot exceed. The loan to value ratio is the loan amount divided by the value of a property. The first method lenders will use to determine a commercial mortgage amount is the loan to value ratio. The commercial loan amount will be calculated using each method, then the lowest of the three loan amounts will be used as the maximum loan amount. There are three methods commercial real estate lenders and banks use in the credit approval process to determine the amount for a commercial real estate loan:
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