How Commercial Lenders Size Loans Using DSCR, LTV, and Debt Yield

Commercial real estate loan sizing is not one formula. It is a comparison of constraints.

Most lenders start with three core tests:

• Loan-to-value.
• Debt service coverage ratio.
• Debt yield.

The maximum loan is usually the lowest amount produced by those tests.

The three loan sizing formulas

Max Loan by LTV = Property Value x Max LTV
Max Loan by DSCR = (NOI / Minimum DSCR) / Loan Constant
Max Loan by Debt Yield = NOI / Minimum Debt Yield

The lender compares those outputs and uses the lowest one as the proceeds cap.

Example

Assume a property has:

• $1,200,000 NOI.
• $16,000,000 value.
• 75% max LTV.
• 1.25x minimum DSCR.
• 10% minimum debt yield.

LTV supports $12,000,000. Debt yield also supports $12,000,000. If the interest rate and amortization only support $10,800,000 at the DSCR floor, then DSCR is the binding constraint.

Why the lowest number controls

A loan has to satisfy every lender requirement at once. If one metric fails, the lender can reduce proceeds until that metric passes. That is why a deal can have acceptable LTV but still receive lower proceeds because DSCR or debt yield is tighter.

What causes each constraint to bind

LTV binds when value is the limiting factor. This can happen when the appraisal is low, the purchase price is high, or the lender uses a conservative value basis.

DSCR binds when annual debt service is high relative to NOI. This is common when interest rates rise or amortization is shorter.

Debt yield binds when the requested loan is high relative to NOI, especially when lenders require a hard income floor.

Why borrowers should size the loan before submitting

Running the numbers before a term sheet helps avoid surprises. If the model shows debt yield caps the loan at $8 million, there is no point asking for $10 million unless the lender's minimum is lower or NOI can be increased.

Use the CRE loan sizing calculator to compare all three constraints, then open the individual DSCR, LTV, and debt yield calculators when you want to isolate one metric.

Commercial loan sizing is most reliable when DSCR, LTV, and debt yield are modeled together instead of one ratio at a time.