Three constraints. The lowest one wins. A worked example so you know which one will bind your deal before you submit it.
Every commercial real estate lender runs the same three calculations on every loan. Debt service coverage ratio. Debt yield. Loan-to-value. Each one produces a maximum loan amount the property can support, and the lender lends the lowest of the three. Knowing which one is going to bind your deal before you submit is the difference between getting a useful term sheet and getting a polite "the math doesn't work."
None of these three is new. What is new, over the last twenty-four months, is which one tends to be the binding constraint. For most of the post-2010 cycle, LTV controlled. Today, DSCR almost always does. Here is each metric in plain English, with the math, and a single worked example showing how to read which constraint is about to cap your loan.
1. Debt service coverage ratio (DSCR)
DSCR is the property's Net Operating Income divided by the annual debt service on the proposed loan. A 1.25x DSCR means the property produces $1.25 of NOI for every $1.00 of mortgage payment. Lenders set a minimum (commonly 1.20x to 1.30x), and the loan is sized so coverage clears that floor at the proposed coupon and amortization.
Typical lender minimums: Agency multifamily 1.20x · Bank perm 1.25x · Life co 1.25x to 1.30x · CMBS 1.20x to 1.25x · HUD 223(f) 1.18x · Bridge debt typically uses stabilized DSCR projections of 1.30x or better.
2. Debt yield
Solving for max loan: Max Loan = NOI ÷ Min Debt Yield. On the same $1M of NOI, a 9% debt yield minimum caps the loan at $11,111,111. A 10% minimum caps it at $10,000,000. An 8% minimum allows $12,500,000.
Typical lender minimums: Agency multifamily 7.0% to 8.0% · Bank perm 8.5% to 10% · Life co 8.0% to 9.5% · CMBS 8.5% to 10% on conduit, higher on hospitality and certain office · HUD 7% to 8% depending on program.
3. Loan-to-value (LTV)
LTV is the loan amount divided by the appraised value (or, for acquisitions, the lower of appraised value and purchase price). LTV = Loan Amount ÷ Property Value. It is the constraint borrowers and brokers reach for first because it is the easiest to explain, and the one that usually does not bind in the current environment.
Solving for max loan is small: Max Loan = Value × Max LTV. On a $14M valuation at 70% LTV, the cap is $9.8M. The catch in 2025 to 2026 is that valuations have moved. The same property the lender saw at $14M in 2021 may be appraised at $11M to $12M today. A 70% LTV cap on $11M is $7.7M, a haircut of $2.1M before any DSCR or debt yield test even runs.
Typical caps: Stabilized multifamily 75% to 80% LTV (agency can reach 80% on workforce housing) · Office, retail, industrial perm 60% to 70% · CMBS 65% to 75% depending on asset · Hospitality 55% to 65% · Bridge to value-add 65% to 75% LTC, with a separate stabilized LTV test on the take-out.
The worked example
Run each test:
- DSCR: Constant at 7.0% / 30-year is 0.0798. Max loan = $980,000 ÷ (1.25 × 0.0798) = $9,824,000.
- Debt yield: Max loan = $980,000 ÷ 0.09 = $10,888,889.
- LTV: Max loan = $14,000,000 × 0.70 = $9,800,000.
What you do with this: before you submit any refinance, run the three calculations on the bid coupon you actually expect, the most defensible NOI you can support with documentation, and a realistic appraised value. The lowest of the three is your loan. If that number is below your existing balance, you are looking at a refi gap, and the conversation needs to be about how to fill it (paydown, mezz, partial recap), not how to argue the lender into a higher number on the constraint that already bound.
What to do with this in practice
- Always solve for which constraint binds before submission. If it is LTV, the appraisal matters most, get the comp set right. If it is DSCR, every basis point of rate matters, competition compresses 25 to 50 bps routinely. If it is debt yield, only NOI growth or a smaller loan fixes it.
- Two lenders quoting the same interest rate can support different loan amounts if their income, coverage, amortization or leverage assumptions differ. Compare those assumptions alongside the rate.
- Underwrite to the lender's NOI, not yours. Lenders haircut market rents to in-place rents, mark up vacancy to market, and apply standard expense ratios. Your sponsor pro forma is irrelevant for sizing; the underwritten NOI is what controls.
None of these three calculations is a black box. They are arithmetic. A senior advisor running a competitive process on your file will tell you which one binds before lenders do, and structure the package around moving that constraint, not the other two.
Frequently asked questions
What is a typical DSCR requirement for a commercial loan?
Most institutional lenders require a 1.20x to 1.30x DSCR at funding for stabilized assets. Agency multifamily often goes to 1.20x; banks and life cos commonly want 1.25x; CMBS sometimes accepts 1.20x with structure. Construction and bridge debt is sized on stabilized DSCR projections, not in-place.
What is debt yield, and why do lenders use it?
Debt yield is Net Operating Income divided by the loan amount, expressed as a percentage. Unlike DSCR, it ignores the interest rate and amortization, so lenders use it as a rate-independent measure of loan risk. Most institutional lenders require 8% to 10% depending on asset class and lender type.
How is LTV calculated for a commercial loan?
LTV is the loan amount divided by the appraised property value (or, for purchases, the lower of appraised value and purchase price). Stabilized permanent debt typically maxes at 60% to 75% LTV depending on asset class. Construction and bridge use loan-to-cost (LTC) instead, typically maxing at 65% to 75%.
Which constraint controls a typical CRE loan today: DSCR, debt yield, or LTV?
In the current rate environment, DSCR is the binding constraint on most stabilized commercial loans.