How Commercial Lenders Size CRE Loans

You submitted a loan request with a 70% LTV and a 1.28x DSCR. Both numbers cleared the lender's stated minimums. The term sheet came back $1.4 million short of your ask. Neither LTV nor DSCR was the problem.

Commercial real estate loan sizing is not one formula. It is a comparison of constraints — and the one you did not model is the one that controls your proceeds.

Most lenders start with three core tests:

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

The maximum loan is the lowest amount produced by those tests. Only that number determines what you actually receive.

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.

The step borrowers most often miss: the lender's NOI is not yours

Both DSCR and debt yield use NOI as their input — but lenders do not use your pro forma NOI. They underwrite their own.

Borrowers typically submit current rents, a 3% vacancy assumption because the building is fully occupied, modest reserves, and projected rent growth. The lender's underwriter applies a market vacancy factor of 5%–10%, carves out $0.15–$0.25 per square foot in replacement reserves, haircuts miscellaneous income, and may stress-test a tenant-departure scenario if any major lease is expiring within 18–24 months.

If your pro forma NOI is $1,200,000, the lender might underwrite $1,104,000 — an 8% reduction. Both DSCR sizing and debt yield sizing flow from that lower number. The gap between your requested proceeds and the term sheet amount is often explained entirely by the difference between those two NOI figures, not by anything wrong with your capital structure.

The NOI haircut alone — before any discussion of the floor or the coverage ratio — can produce a million-dollar gap in proceeds. Ask your lender upfront how they treat vacancy, reserves, and tenant rollover. That conversation before the term sheet is more valuable than any argument after it.

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 reduces 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.

According to Federal Reserve commercial real estate supervisory guidelines and FDIC real estate lending standards, regulated lenders are expected to underwrite income-producing properties against both income-based and collateral-based tests simultaneously — and lend the more conservative result. The Commercial Real Estate Finance Council (CREFC) documents this in its CMBS program standards.

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. In a high-rate environment, DSCR is frequently the primary constraint capping proceeds on deals that would have worked 18 months ago.

Debt yield binds when the requested loan is high relative to NOI, especially when lenders require a hard income floor. This is the dominant constraint in CMBS programs, on office and retail assets, and on any deal where the appraisal supports more leverage than the income justifies.

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 against the lender's underwritten NOI — not one ratio at a time against your own projections.

Frequently asked questions

Why do lenders require all three constraints instead of just the most conservative one? Each metric measures a different dimension of risk. LTV measures collateral coverage in liquidation. DSCR measures payment coverage from current income. Debt yield measures income cushion independent of loan terms. A deal can look safe on any two of them while being risky on the third. Running all three simultaneously is what catches the cases where two metrics are engineered to look good but the underlying risk has not been eliminated.

What happens if the three constraints produce very different maximum loan amounts? The lowest result controls — the lender advances only the amount that clears all three tests simultaneously. If debt yield supports $12M but DSCR only supports $10M, the loan closes at $10M (or less, if LTV is lower than either). Understanding which constraint is binding tells you which assumption to address if you need more proceeds: more equity for LTV, rate or amortization for DSCR, or more NOI for debt yield.

How does a lender decide which NOI to use in sizing? The lender constructs their own underwritten NOI independently of the borrower's projections. They typically start with the current rent roll, apply a market vacancy factor, deduct replacement reserves, and may stress-test rolling leases or uncertain income items. The Fannie Mae multifamily underwriting process and comparable Freddie Mac guidelines document specific income verification requirements for agency programs.

Does the loan constant change with interest rates, and how does that affect sizing? The loan constant — annual debt service divided by loan amount — rises when rates increase or amortization shortens. DSCR sizing divides maximum annual debt service by the loan constant to produce a maximum loan. A higher loan constant means the same NOI supports a smaller loan at any given DSCR minimum. LTV and debt yield are unaffected by the loan constant.

What is the fastest way to identify the binding constraint on a deal? Use the reverse formulas for each: Max Loan by DY = NOI ÷ Minimum DY; Max Loan by LTV = Value × Max LTV; Max Loan by DSCR requires also knowing the loan constant (rate and amortization). The CRE loan sizing calculator does all three simultaneously. The constraint that produces the lowest number is the one to focus on.