Why is debt yield important in underwriting?

• A. It measures risk in relation to loan amount and is independent of valuations.
• B. It determines property tax.
• C. It measures cash-on-cash return.
• D. It sets cap rate.

Answer: (A)

Debt yield is a lender-focused risk measure that compares the property's operating income to the size of the loan, and it does this independent of how the property is valued. It’s calculated as NOI divided by the loan amount. In underwriting, this tells you how much annual income the loan relies on and how much cushion there is if conditions worsen. A higher debt yield means the property’s income can support a larger loan with more safety, while a lower debt yield signals greater risk that NOI won’t cover the debt if occupancy or rents fall. Because it doesn't depend on valuations or appraisal assumptions, it allows apples-to-apples comparisons across deals with different prices or cap rates and helps set minimums for loan acceptance.

This isn’t about property taxes, which are determined by local governments; it isn’t a measure of cash-on-cash return, which looks at investor cash flow relative to cash invested; and it isn’t a cap rate, which derives from NOI and sale price to indicate value.