CRE Loan Sizing Example: Step-by-Step Walkthrough
Walk through a commercial mortgage loan sizing example using DSCR, LTV, and debt yield to find the binding constraint.
To size a commercial mortgage, calculate the maximum loan under each of three constraints — LTV, DSCR, and debt yield — then take the lowest result. That lowest figure is the binding constraint and the actual loan amount the lender will fund. This step-by-step example walks through each calculation using a real industrial acquisition.
A borrower submitting a $15 million loan request on a $20 million industrial acquisition ran the numbers on LTV and stopped there. 70% LTV — conservative by most standards, well within the lender's cap. No one ran DSCR or debt yield before the term sheet came back.
The DSCR at a 6.5% rate over 30 years produced a debt service of $1,137,000. The underwritten NOI was $1,100,000 — a property fully occupied, but the lender applied a 5% vacancy and $0.25/sqft replacement reserve. The DSCR came back at 0.97x. The loan failed. To hit the lender's 1.25x DSCR minimum, the maximum loan dropped to $11,600,000.
Debt yield would have caught it in 30 seconds.
Here is the same deal worked step by step.
The property inputs
- Purchase price: $20,000,000
- Underwritten NOI (after lender adjustments): $1,100,000
- Max LTV: 75%
- Minimum DSCR: 1.25x
- Minimum debt yield: 9.0%
- Interest rate: 6.5%, 30-year amortization
Step 1: Max loan by LTV
Max Loan by LTV = Property Value x Max LTV
Max Loan by LTV = $20,000,000 x 75% = $15,000,000
The collateral supports the full $15,000,000 request.
Step 2: Max loan by debt yield
Max Loan by Debt Yield = NOI / Minimum Debt Yield
Max Loan by Debt Yield = $1,100,000 / 9% = $12,222,222
The income floor caps the loan at $12.2 million — already $2.8 million below the LTV-supported amount.
Step 3: Max loan by DSCR
DSCR sizing converts NOI into maximum annual debt service, then converts that into loan proceeds using the loan constant.
Max Annual Debt Service = NOI / Minimum DSCR
Max Annual Debt Service = $1,100,000 / 1.25 = $880,000
At 6.5% over 30 years, the loan constant is approximately 7.58%.
Max Loan by DSCR = $880,000 / 7.58% = about $11,609,000
Step 4: Pick the lowest result
| Constraint | Max loan |
|---|---|
| LTV | $15,000,000 |
| Debt yield | $12,222,222 |
| DSCR | ~$11,609,000 |
The maximum loan is approximately $11,609,000 — about $3.4 million below the LTV-supported amount, and below the borrower's original $15M request. DSCR is the binding constraint. LTV clears, debt yield clears at the DSCR-supported proceeds, but the payment coverage test at today's rates is what limits the loan.
Why debt yield is still critical here
In this example DSCR bound the proceeds before debt yield did. But notice what changes if the loan is structured interest-only — common on bridge deals where there is no amortization.
On an interest-only basis at 6.5%, the annual interest payment on a $12,222,222 loan is roughly $794,444. The DSCR becomes $1,100,000 / $794,444 = 1.38x — well clear of the 1.25x minimum. Suddenly DSCR gives you green all the way to the debt yield cap of $12,222,222.
That is exactly why CMBS lenders and institutional lenders use debt yield as a rate-proof backstop: interest-only structures make DSCR look artificially strong. Without a debt yield floor, a borrower could structure any loan to pass DSCR by eliminating amortization. Debt yield prevents that. See what is debt yield for a full explanation of why it is immune to loan structure.
Scenario 2: when rates rise, DSCR tightens further
Keep the same property and lender limits, but reprice the loan at 7.50% over 25 years. The loan constant rises to about 8.87%.
Max Loan by DSCR = $880,000 / 8.87% = about $9,921,000
| Constraint | Scenario 1 (6.5% / 30yr) | Scenario 2 (7.5% / 25yr) |
|---|---|---|
| LTV | $15,000,000 | $15,000,000 |
| Debt yield | $12,222,222 | $12,222,222 |
| DSCR | ~$11,609,000 | ~$9,921,000 |
LTV and debt yield are unchanged — neither uses loan terms. DSCR falls to $9.9M purely because the loan constant climbed. A borrower who only modeled LTV would not see this coming.
Common mistakes in loan sizing
- Stopping at the first passing metric. A deal that clears LTV can still be capped by DSCR or debt yield.
- Using pro forma NOI instead of underwritten NOI. Lenders apply vacancy, reserves, and credit loss adjustments. If your NOI drops by 8% on the lender's worksheet, your maximum loan under debt yield drops by 8% too — automatically.
- Ignoring the loan constant. Dividing NOI by DSCR gives debt service, not a loan amount. You still have to divide by the loan constant.
- Assuming the answer is static. The binding constraint switches as rates, value, or lender floors move.
Use the CRE loan sizing calculator to run the same comparison with your numbers, the DSCR calculator to stress the rate, or the max loan amount formula for the math behind each constraint.
Frequently asked questions
Why did my deal pass LTV and still come back short? DSCR or debt yield — or both — likely capped proceeds below the LTV-supported amount. The three constraints apply simultaneously. Running only LTV and assuming the loan closes at that amount is one of the most common sizing errors in CRE finance.
How do I know which constraint is going to bind before I submit? Run all three reverse formulas. Max Loan by DY = NOI ÷ Minimum DY. Max Loan by LTV = Value × Max LTV. Max Loan by DSCR = (NOI ÷ Min DSCR) ÷ Loan Constant. The smallest result is the binding constraint. The CRE loan sizing calculator does this automatically. If you just need the single metric, use a debt yield calculator for commercial real estate.
What is debt yield ratio and how does it differ from the sizing calculation? Debt yield ratio is NOI divided by the loan amount, expressed as a percentage — the same formula used throughout this example. The full loan sizing calculation applies that ratio alongside LTV and DSCR simultaneously and reports which constraint binds. The ratio alone tells you the income cushion; the sizing calculation tells you how much you can actually borrow.
What is a loan constant and where do I get it? The loan constant is annual debt service divided by the loan amount, expressed as a percentage. It is determined by the interest rate and amortization period. At 6.5% over 30 years it is approximately 7.58%. At 7.5% over 25 years it is approximately 8.87%. The commercial mortgage payment calculator lets you calculate debt service for any rate and amortization combination.
If I bring more equity to hit the LTV cap, does that fix a DSCR problem? Not directly. DSCR compares NOI to annual debt service, not to equity. Bringing more equity reduces the loan amount, which reduces debt service, which improves DSCR — but only if the lower loan amount produces a lower debt service payment. A smaller loan at the same rate and amortization does generate less annual debt service, so yes — if you reduce the loan request, DSCR typically improves. So does debt yield. More equity is often the only available lever when both income-based constraints are binding.
How does the Mortgage Bankers Association track CRE loan sizing trends? The MBA publishes commercial mortgage origination surveys that track how loan proceeds, LTVs, DSCRs, and debt yield requirements are shifting across lender types and property segments. Those reports are useful context for understanding how tight any given constraint is relative to historical norms.
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