Cap Rate & Debt Yield Calculator for CRE

The capitalization rate (cap rate) formula is Cap Rate = Net Operating Income ÷ Property Value. NOI is annual income after operating expenses but before debt service, taxes, and depreciation. Property value is purchase price for an acquisition or appraised value for a refinance.

Debt yield is Net Operating Income ÷ Loan Amount, expressed as a percentage. It measures the return a lender would receive if the property were taken back at face value. Debt yield is rate-agnostic — unlike DSCR and LTV, it doesn't move when interest rates or appraised values shift, which is why it has become the dominant lender metric since the 2008 cycle.

Most CMBS and life-insurance-company lenders require a minimum debt yield of 8% to 10%, with 10% being the most common floor. Banks often underwrite to 9% to 11% on stabilized CRE. Higher debt yields are required for hospitality, special-use, and transitional assets. Debt yields below 7% are typically considered aggressive and require strong sponsorship.

Cap rate measures the yield a buyer earns on the property's purchase price (NOI ÷ Value). Debt yield measures the yield a lender earns on the loan amount (NOI ÷ Loan). Cap rate is a market metric used to value real estate; debt yield is a credit metric used to size loans.

Loan-to-Value (LTV) = Loan Amount ÷ Property Value, expressed as a percentage. Most stabilized CRE lenders cap LTV at 65% to 75%. Construction loans typically cap loan-to-cost (LTC) at 65% to 75% and require an as-completed LTV check at certificate of occupancy.

CRE lenders size loans by running three constraints in parallel: maximum LTV, minimum DSCR at the proposed rate and amortization, and minimum debt yield. The smallest of the three results is the maximum supportable loan amount. Aggressive markets are usually DSCR-constrained; conservative markets are usually debt-yield- or LTV-constrained.

Debt yield doesn't move with interest rates or cap rates, so it cannot be gamed by extending amortization or assuming a low future cap rate. After 2008, lenders, regulators, and CMBS investors learned that loans sized purely to DSCR and LTV at low rates could become severely under-collateralized when rates rose. Debt yield is rate- and value-agnostic, which is exactly why it survives across cycles.

Debt yield is used by underwriters, credit committees, CMBS investors, and rating agencies to size and grade CRE loans. It provides a clean comparison across deals — a 10% debt yield in 2014 means the same thing as a 10% debt yield in 2024, regardless of where rates and cap rates are.

Property value is approximately NOI ÷ Cap Rate. A 25 basis point change in market cap rate changes value materially. On a property with $1,000,000 of NOI, a move from a 6.0% cap rate to a 6.25% cap rate cuts value from $16.7M to $16.0M — about $700,000.