Most commercial lenders do not simply lend a percentage of the purchase price. They run several tests on the property's income and value, and the loan is limited to the lowest amount that passes every test. Understanding which test is "binding" on your deal is the fastest way to know whether more leverage is realistic.
Loan-to-value (LTV) and loan-to-cost (LTC)
LTV divides the loan by the property's appraised value. LTC divides it by total project cost, which matters for acquisitions with renovation budgets and for construction. A $10 million property with a 65% LTV limit supports at most a $6.5 million loan on this test.
Debt-service coverage ratio (DSCR)
DSCR divides net operating income (NOI) by annual debt service. A lender requiring 1.25x wants $1.25 of NOI for every $1.00 of principal and interest. The maximum loan on this test depends on the interest rate and amortization: higher rates or shorter amortization mean a smaller loan for the same NOI.
Example (hypothetical): NOI of $1,000,000 and a 1.25x requirement allow $800,000 of annual debt service. At 7.0% with 30-year amortization, each $1 of loan costs about $0.0798 a year, so the DSCR test supports a loan of about $10.0 million.
Debt yield
Debt yield divides NOI by the loan amount, ignoring the interest rate. Many CMBS and debt-fund lenders use it as a floor. A 9% minimum on $1,000,000 of NOI caps the loan at about $11.1 million regardless of how low rates are.
Underwritten NOI is not always your NOI
Lenders typically underwrite their own NOI, which can be lower than the seller's figures. Common adjustments include market vacancy, management fees, replacement reserves, normalized expenses and, for hotels, brand fees and FF&E reserves. That is why franchise economics and expense assumptions can change loan proceeds.
Where to negotiate
- If DSCR is binding, a longer amortization, an interest-only period, a lower rate or higher underwritten NOI increases proceeds.
- If LTV is binding, a stronger appraisal or a program with higher leverage helps.
- If debt yield is binding, only more NOI or a different lender type will increase the loan.
Try our loan sizing calculator to see which test limits your loan.