You Asked for $7.5 Million. The Lender Said $7 Million.

You found a $10 million multifamily property. The NOI is $700,000. Your lender offers 75% LTV. Simple math: $10 million times 75% equals $7.5 million. You start structuring the deal around that number.

Then the term sheet comes back at $7.0 million, and the lender won't budge.

What happened? The lender didn't just run one test. They ran three. And they gave you the lowest number. Understanding which test controls your loan amount, and why, is one of the most practical underwriting skills you can build.

The Dual-Constraint Framework (Actually Triple)

Commercial real estate lenders size loans using multiple simultaneous constraints. Each test produces a different maximum loan amount. The borrower receives the lowest of the three.

Test 1: LTV (Loan-to-Value). This limits the loan as a percentage of property value. If the lender caps LTV at 75%, the maximum loan on a $10 million property is $7.5 million. This is the test most investors think about first, and often the only one they think about.

Test 2: DSCR (Debt Service Coverage Ratio). This limits the loan based on the property's ability to service the debt. The formula is:

Max Loan = NOI / (Minimum DSCR x Loan Constant)

The loan constant is the annual debt service per dollar of loan, expressed as a percentage. For a 7% interest rate with 30-year amortization, the loan constant is approximately 7.98%. For a 5% rate with 30-year amortization, it drops to about 6.44%.

Test 3: Debt Yield. This test emerged as a standard constraint after the Global Financial Crisis. Debt yield is NOI divided by the loan amount, and lenders typically require a minimum of 8% to 10%. The formula inverts to:

Max Loan = NOI / Minimum Debt Yield

Debt yield is independent of interest rates and amortization. It measures the property's income return on the loan dollar regardless of loan terms. That independence is exactly why lenders adopted it after 2008: when rates dropped to zero and DSCR tests became too permissive, debt yield acted as a floor on underwriting discipline.

The Worked Example: $10M Multifamily

Here are the assumptions: a $10 million multifamily property with $700,000 in NOI. The loan terms are a 7% interest rate with 30-year amortization. The lender requires 75% maximum LTV, 1.25x minimum DSCR, and 10% minimum debt yield.

Test 1: LTV

$10,000,000 x 75% = $7,500,000

Test 2: DSCR

$700,000 / (1.25 x 0.0798) = $700,000 / 0.0998 = $7,014,028

The loan constant of 7.98% reflects the full annual payment (principal plus interest) per dollar of loan. At 1.25x coverage, the property needs to generate $1.25 for every $1.00 of debt service. That limits proceeds more than the LTV test.

Test 3: Debt Yield

$700,000 / 10% = $7,000,000

Result

Test Max Loan Binds?
LTV (75%) $7,500,000 No
DSCR (1.25x) $7,014,028 No
Debt Yield (10%) $7,000,000 Yes

The borrower receives $7,000,000. The debt yield test is the binding constraint. The $500,000 gap between the LTV test and the actual proceeds is real money, either additional equity you need to raise or a signal to renegotiate the purchase price.

Why the Binding Constraint Shifts with Rates

The critical insight: the property didn't change. The NOI is still $700,000. The value is still $10 million. But which test controls depends heavily on the interest rate environment.

Watch what happens when rates move.

Low-Rate Environment: 5% Interest, 30-Year Amortization

At a 5% rate, the loan constant drops to approximately 6.44%.

  • LTV test: $10,000,000 x 75% = $7,500,000
  • DSCR test: $700,000 / (1.25 x 0.0644) = $700,000 / 0.0805 = $8,695,652
  • Debt yield test: $700,000 / 10% = $7,000,000

The DSCR test allows $8.7 million in proceeds, well above the LTV cap. LTV binds at $7.5 million (assuming the debt yield test isn't applied, or is set at a lower threshold like 8%, which would yield $8.75 million). The DSCR test is irrelevant because cheap debt makes coverage easy.

High-Rate Environment: 7% Interest, 30-Year Amortization

This is the example we already ran. The DSCR test drops to $7.0 million. Debt yield and DSCR are fighting over which one constrains more, and both are tighter than LTV.

Rising-Rate Environment: 9% Interest, 30-Year Amortization

At a 9% rate, the loan constant rises to approximately 9.65%.

  • LTV test: $10,000,000 x 75% = $7,500,000
  • DSCR test: $700,000 / (1.25 x 0.0965) = $700,000 / 0.1206 = $5,803,318
  • Debt yield test: $700,000 / 10% = $7,000,000

Now the DSCR test crushes proceeds down to $5.8 million. Same property. Same NOI. Same value. But the borrower gets $1.7 million less than the debt yield test and $1.2 million less than even a 65% LTV would produce.

Which Constraint Typically Binds?

Rate Environment Typical Binding Constraint Why
Low rates (3-5%) LTV or Debt Yield Cheap debt makes DSCR coverage easy. LTV caps how much you can borrow relative to value. Debt yield provides a floor.
Mid rates (5-7%) Debt Yield or DSCR These two compete. The binding one depends on the specific NOI, lender thresholds, and exact rate.
High rates (7%+) DSCR Expensive debt eats into coverage. The property needs much higher NOI per dollar of loan to clear the DSCR floor.

This table explains a pattern that confused many investors between 2021 and 2024. In 2021, at 3.5% rates, deals were capped by LTV. Investors got used to the math. Then rates doubled, and suddenly the same deal penciled at 25% to 30% lower proceeds. The property didn't deteriorate. The binding constraint shifted from LTV to DSCR.

The Mental Model: Know Which Constraint Binds Before You Call the Lender

Before you contact a lender, run all three tests yourself. You need four inputs: property value, NOI, the expected interest rate, and the amortization schedule.

  1. Calculate the loan constant from the rate and amortization.
  2. Run the LTV test: Value x Max LTV.
  3. Run the DSCR test: NOI / (Min DSCR x Loan Constant).
  4. Run the debt yield test: NOI / Min Debt Yield.
  5. Take the lowest number. That is your realistic loan amount.

If the DSCR test produces the lowest number, you have two options: increase NOI (raise rents, cut expenses) or accept lower leverage. If the debt yield test binds, the only solution is more NOI per dollar of loan. If LTV binds, the property's cash flow supports more debt than the lender will give based on value alone, which is actually a good position to be in.

This exercise takes five minutes and prevents the most common mistake in deal structuring: building your equity raise, your return projections, and your partnership structure around $7.5 million in proceeds when the lender will only give you $7.0 million.

Why Debt Yield Exists at All

Before the Global Financial Crisis, most lenders relied on LTV and DSCR alone. The problem: when rates dropped to historic lows, the DSCR test became extremely permissive. A property with moderate NOI could support a massive loan because debt service was so cheap. LTV was the only real check, and appraisals during bubbles tend to be generous.

Debt yield solves this by asking a rate-independent question: what is the lender's income yield on the loan, regardless of terms? If a lender extends $7 million against $700,000 in NOI, the debt yield is 10%. That number doesn't change whether rates are 3% or 9%.

Research by Esaki, L'Heureux, and Snyderman on CMBS loan defaults found that loans with debt yields below 8% showed significantly higher default rates across market cycles. The 8% to 10% threshold represents where historical loss severity drops meaningfully.

Post-GFC, debt yield became the third leg of the underwriting stool. Many CMBS lenders and life insurance companies now treat it as a hard floor.

Common Mistakes

Sizing the deal on LTV alone. This is the most frequent error among investors coming from residential real estate, where LTV is the primary (often only) constraint. In commercial lending, LTV is frequently not the binding test.

Ignoring the loan constant. Comparing cap rate to the interest rate instead of the loan constant will overestimate your DSCR. A 7% cap rate looks like it covers a 7% interest rate. But the loan constant at 7% with 30-year amortization is 7.98%, meaning the property is actually negatively levered and your DSCR is lower than you think.

Not stress-testing the DSCR at maturity. Your loan matures in 5 to 10 years. If rates are higher at maturity, the loan constant on a new loan will be higher, and your refinancing DSCR will be lower. Run the three tests at the expected refinancing rate, not just today's rate.

Assuming all lenders use the same thresholds. CMBS lenders, life companies, banks, and agency lenders (Fannie/Freddie for multifamily) all use different threshold combinations. Agency lenders may allow 80% LTV with 1.20x DSCR. A life company may cap at 65% LTV with 1.35x DSCR but not apply a debt yield test at all. Know your lender's matrix before running the numbers.

Run Your Own Numbers

The Quick Screen tool on Yield Desk calculates all three constraints automatically. Enter your NOI, property value, rate, and amortization, and it shows which test binds and what your realistic proceeds are.

Knowing your actual loan amount before you call a lender changes the entire negotiation. You stop asking "how much can I get?" and start asking "given that DSCR binds at $7 million, what rate improvement would I need to reach $7.5 million?" That is the question an institutional borrower asks.

Where to Go Next

Sources: Geltner, D., Miller, N., Clayton, J., & Eichholtz, P., Commercial Real Estate Analysis and Investments, Chapter 18 (Mortgage Financing and Loan Mechanics). Esaki, H., L'Heureux, S., & Snyderman, M., "Commercial Mortgage Defaults: An Update," Real Estate Finance, default and loss severity data across CMBS vintages.

This is educational content, not investment advice. Consult qualified legal and financial advisors before making investment decisions.