Determining the Maximum Loan Amount in CRE

Jan 15, 2025

What are the debt metrics that determine the maximum loan amount?  While there are many factors that lenders consider, let’s focus on three key metrics:

Loan-to-Value (LTV)

  • Measures the loan amount relative to the property’s value.

  • LTV = Loan Amount/Property Value

Debt-Service-Coverage-Ratio (DSCR)

  • Measures the property’s ability to cover debt payments.

  • DSCR = NOI/Debt Service

Debt Yield (DY)

  • Measures the lender’s risk/return on their investment, think of this as the lender’s cap rate.

  • DY = NOI/Loan Amount

Example:

The rate was quoted at 6.50% on a 30-year amortization, the lender goes up to a 60% LTV, underwrites to a 1.25x DSCR, and needs at least a 9.00% DY.  The subject property is estimated to be worth $10,440,000 with a net operating income of $522,000.

Answer:

The max loan amount would be $5,505,737, constrained by the DSCR but checks all the boxes of the lender’s parameters.

Calculations:

The DSCR calculates as follows $34,800 monthly debt service or $417,600 annual debt service, $522,000/$417,600 = 1.25x DSCR.  The debt yield is calculated as follows $522,000/$5,505,737 = 9.48% DY.  The loan-to-value is $5,505,737/$10,440,000 = 53% LTV. 

Understanding these metrics isn’t just for lenders.  Borrowers, brokers, and investors can use them to structure deals more effectively.