Summary: Three ratios size almost every income-property loan: debt service coverage, debt yield and loan-to-value. Each is simple arithmetic on top of hard-won inputs from the rent roll, the operating statement and the appraisal. This post shows how each is built, the supervisory limits that bound them, and the monitoring that follows closing, then points to how the work is automated.
Start with net operating income
Everything begins with NOI. From the rent roll the analyst builds gross potential rent, subtracts vacancy and credit loss, and adds other income such as parking or reimbursements. From the trailing operating statement come the expenses, normalized to remove one-time items and to add management fees and reserves the lender requires. What remains is NOI.
The inputs are the hard part. Every property manager exports a different rent roll. A multifamily unit mix looks nothing like an office lease schedule with expirations, options and reimbursements. Expense statements bury one-time items in lines with no standard names. Getting to a defensible NOI is most of the work.
The three ratios
Debt service coverage ratio. The OCC’s Commercial Real Estate Lending handbook defines it: “The DSCR, calculated by dividing the NOI by the annual debt service requirements, measures the borrower’s ability to service its debt.” A minimum of 1.20x to 1.35x is common in policy, higher for riskier property types.
Debt yield. The handbook again: “Debt yield is the ratio of NOI to debt. It is calculated by dividing the NOI by the loan amount with the quotient expressed as a percent.” Because it ignores the interest rate and amortization, debt yield is the sizing test that does not improve when rates fall.
Loan-to-value. Loan amount divided by appraised value. The interagency real estate lending guidelines set supervisory limits: 65 percent for raw land, 75 percent for land development, 80 percent for commercial and multifamily construction, and 85 percent for improved property. Loans above those limits “should be identified in the institution’s records, and their aggregate amount reported at least quarterly to the institution’s board of directors.”
The loan is sized to the tightest of the three under the lender’s policy, then stress-tested. The handbook says capitalization rates, interest rates and DSCRs “should be stress-tested to determine whether a property will likely remain viable during a period of economic stress.”
After closing
The ratios do not stop mattering at funding. The handbook says loan covenants “should require the submission of periodic financial information pertaining to the project, borrowing entities, and guarantors,” and that for stable properties “annual operating statements and rent rolls may be adequate,” while lease-up properties or those with frequent expirations can warrant monthly or quarterly collection. Information collected “should be analyzed in a timely manner to assess financial performance, tenant rollover risk,” and covenant compliance.
At portfolio level, the 2006 interagency guidance on CRE concentrations states that “A strong management information system (MIS) is key to effective portfolio management.” It flags institutions for further supervisory analysis when construction and land loans reach 100 percent of total capital, or total CRE reaches 300 percent with 50 percent growth over 36 months. Reporting by property type, geography and LTV band has to come from the same data the underwriters used.
How the automated version works
On MightyBot, agents classify the deal package, extract rent roll rows and operating statement lines, and normalize them to one schema, with a pointer from every value to its page. The lender’s underwriting standards are written as plain-English policies with a profile per property type, so multifamily, industrial and office run under their own vacancy, expense and reserve assumptions. The agent computes NOI, DSCR, debt yield and LTV, applies the stress cases, sizes the loan to the tightest constraint, and flags policy exceptions with the evidence attached.
After closing the same pipeline tests statements and rent rolls as they arrive and rolls results up to portfolio reporting. The buyer’s checklist is on the CRE lending page.
The same ratios drive the first pass on a submitted deal and the last test before maturity. DealScreen screens each loan request against the credit box before underwriting, DealScreen Multifamily ties the unit-level rent roll to the T12, and MaturityWatch resizes loans as refinances as they approach maturity.