What Is a Loan Constant in CRE Finance?
The loan constant converts annual debt service into a percentage of the loan balance. It is the missing step in every DSCR-to-loan-amount conversion.
The loan constant is annual debt service divided by the loan balance, expressed as a percentage. At 6.5% interest over 30 years, the loan constant is approximately 7.58%. It is the number that converts a DSCR-derived maximum debt service into a maximum loan amount — the step most borrowers skip when sizing a deal.
You divided the NOI by the minimum DSCR and got $960,000. That is the maximum annual debt service the property can support. Great. Now what?
$960,000 of debt service is not a loan amount. To get from debt service to a loan, you need to divide by the loan constant — the annual debt service per dollar of loan balance at your specific rate and amortization. Skip that step and your DSCR sizing is incomplete.
This is one of the most common errors in commercial real estate underwriting. The loan constant is referenced in every multi-constraint sizing model but almost never explained.
The loan constant formula
Loan Constant = Annual Debt Service / Loan Amount
Rearranging:
Loan Amount = Annual Debt Service / Loan Constant
The loan constant is fully determined by two inputs: interest rate and amortization period. It does not depend on the loan amount. A 6.5% rate over 30 years produces the same loan constant whether the loan is $5 million or $50 million.
Loan constant reference table
| Interest rate | 25-year amortization | 30-year amortization |
|---|---|---|
| 5.5% | 7.34% | 6.82% |
| 6.0% | 7.73% | 7.19% |
| 6.5% | 8.10% | 7.58% |
| 7.0% | 8.48% | 7.98% |
| 7.5% | 8.87% | 8.39% |
| 8.0% | 9.26% | 8.80% |
Notice that higher rates and shorter amortization both produce higher loan constants — meaning the same income supports a smaller loan as rates rise or amortization shortens. This is precisely why DSCR becomes the binding constraint in high-rate environments.
Putting it together: DSCR sizing step by step
Using a property with $1,200,000 NOI, a 1.25x DSCR minimum, and a loan at 6.5% over 30 years:
Step 1 — Maximum annual debt service:
$1,200,000 / 1.25 = $960,000
Step 2 — Look up the loan constant: At 6.5% / 30 years → 7.58%
Step 3 — Maximum loan by DSCR:
$960,000 / 7.58% = $12,664,907
That final number — $12,664,907 — is the maximum loan the income can support at these rate and amortization terms. Compare it against debt yield sizing ($1,200,000 / 10% = $12,000,000) and LTV sizing to find the binding constraint. The CRE loan sizing calculator runs all three simultaneously.
How the loan constant changes with rate
The loan constant is where rising rates translate into lower loan proceeds. Everything else in the formula stays fixed — the NOI, the DSCR minimum, the debt yield floor. Only the loan constant moves with rate.
Using $1,200,000 NOI at 1.25x DSCR:
| Rate / Amortization | Loan constant | Max debt service | Max loan by DSCR |
|---|---|---|---|
| 5.5% / 30 yr | 6.82% | $960,000 | $14,076,246 |
| 6.5% / 30 yr | 7.58% | $960,000 | $12,664,907 |
| 7.5% / 30 yr | 8.39% | $960,000 | $11,442,193 |
| 7.5% / 25 yr | 8.87% | $960,000 | $10,822,998 |
From 5.5% to 7.5% on a 30-year amortization, the maximum DSCR-supported loan drops by $2.6 million on the same property producing the same income. That is what rising rates actually do to CRE loan sizing — and it all flows through the loan constant.
Interest-only loans: when there is no amortization
An interest-only loan has no principal repayment — debt service equals interest only. The loan constant on an IO loan is simply the interest rate:
IO Loan Constant = Interest Rate
7.0% IO loan → loan constant = 7.0%
Because IO loan constants are lower than amortizing loan constants at the same rate, IO structures produce higher DSCR-supported loan amounts. That is why bridge loans — which are frequently interest-only — can show strong DSCR coverage while still being constrained by debt yield. The debt yield formula ignores whether the loan is IO or amortizing; the loan constant does not.
Why debt yield does not use the loan constant
Debt yield divides NOI directly by loan amount. There is no rate, no amortization, no loan constant in the formula. That is its defining advantage: the result does not change when loan terms change.
DSCR uses the loan constant because it measures payment coverage — and payment size depends entirely on the rate and the amortization period. Debt yield bypasses that dependency entirely, which is why lenders use it as a rate-proof floor alongside DSCR.
Two constraints, two different sensitivities:
| Debt yield | DSCR | |
|---|---|---|
| Uses NOI | Yes | Yes |
| Uses loan amount | Yes | Via loan constant |
| Affected by rate | No | Yes |
| Affected by amortization | No | Yes |
| Affected by IO structure | No | Yes |
Frequently asked questions
How do I calculate the loan constant if I only know the monthly payment? Multiply the monthly payment by 12 to get annual debt service. Then divide by the loan amount. If a $10,000,000 loan has a monthly payment of $63,207, annual debt service is $758,484, and the loan constant is $758,484 / $10,000,000 = 7.58%.
Does the loan constant change during the life of the loan? No — for a fixed-rate loan, the loan constant is fixed at origination. For a floating-rate loan, the loan constant changes as the underlying index rate moves, which is why floating-rate loans carry more DSCR volatility risk. Variable-rate DSCR sizing typically uses a stressed rate — often a floor rate or a forward rate — rather than the current index rate.
What is the relationship between the loan constant and the cap rate? The loan constant and cap rate are sometimes compared to evaluate whether a deal is positively or negatively leveraged. If the cap rate exceeds the loan constant (e.g., 8% cap rate, 7.58% loan constant), the deal is positively leveraged — the property yields more than the debt costs. If the loan constant exceeds the cap rate (e.g., 5% cap rate, 7.58% loan constant), the deal is negatively leveraged — the debt costs more than the property yields, which means cash-on-cash return is below the unleveraged return. In today's rate environment, many deals are negatively leveraged, making debt yield and DSCR constraints tighter simultaneously.
What is a loan constant (or debt constant) and where do I get it? The loan constant, frequently referred to in commercial real estate as the debt 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.
Why do lenders use a stressed rate in DSCR sizing instead of the actual note rate? For floating-rate bridge loans, lenders cannot underwrite DSCR at today's index rate because the rate will change. Standard practice is to use a stressed rate — typically the greater of the current rate or a floor (often 7%–8%) — to ensure the DSCR coverage holds even if rates rise. FDIC commercial real estate lending guidance and Federal Reserve supervisory standards both require regulated lenders to underwrite floating-rate CRE loans at stressed rates rather than spot rates.
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