Lenders use debt yield as a sanity check on DSCR. DSCR is sensitive to interest rate and amortization, but debt yield is not — it strips out the loan terms and asks: if we owned this asset outright, what cap rate would we earn on our loan dollars?
A $6.5M loan against $600,000 of NOI is a 9.2% debt yield. Most lenders set minimums in the 8-10% range. When rates fall and DSCRs look generous, debt yield is the metric that prevents the lender from over-sizing. When rates rise, debt yield is the metric the lender holds the line on, even when the sponsor argues for a larger loan based on improving cap rates.
