Debt Yield ratio
Emil Ackerman and John Pyke-Nott have stated that, In commercial financing, CMBS lenders can be an extraordinarily cheap source of capital and non-recourse debt. It is important to recognize that these commercial lenders look closely at the debt yield ratio in order to determine a level of comfort when establishing the right commercial loan amount according to Emil Ackerman and John Pyke-Nott.
Emil Ackerman John Pyke-Nott have advised thatThe debt yield ratio is defined as the Net Operating Income (NOI) divided by the first mortgage debt (loan) amount, times 100. For example, let's say that a commercial property has a NOI of $500,000 per year, and a CMBS lender has been asked to make a new first mortgage loan in the amount of $5,750,000. $500,000 divided by $5,750,000 is approximately 9.00% debt yield ratio. What this means is that the commercial lender would enjoy an approximately 9.00% cash-on-cash return on its money if it foreclosed on the commercial property. Not a bad return, right says Emil Ackerman and John Pyke-Nott.
According to Emil Ackerman and John Pyke-Nott It is important to note that the debt yield does not take into account the capitalization rate used to assess the value of any one commercial property, nor does it consider the interest rate or amortization of the loan. The key thing that debt yields establish is how much the commercial lender is willing to advance on a commercial property compared to the property's cash flow or NOI. If a commercial lender isn't going to require a personal guaranty on a commercial loan, they need to get comfortable with the possibility that the asset is delivering a satisfactory return statedEmil Ackerman and John Pyke-Nott.
Emil Ackerman and John Pyke-Nott commented thatThe next question to ask is: what is a desirable debt yield for most CMBS commercial lenders? This ratio changes based on the evolving risk appetite for commercial lenders in general; however, a typical rule of thumb is 10%, which may translate to a 60% to 70% Loan to Value ratio says Emil Ackerman and John Pyke-Nott.
Emil Ackerman and John Pyke-Nott Having said that, the market is changing and for the better. Case in point, commercial lenders are reducing their debt yields to sub 9% levels for Class A offices and even multifamily. It is not unusual to see debt yield in the mid 9% range, with commercial loan to values of 75% to 80%!! You will find that debt yields are the lowest in major MSAs like New York, DC, etc. Rates are ranging in the mid 3% range to low 4% range, presenting an excellent opportunity for real estate investors to take advantage of the low cost of borrowing according toEmil Ackerman and John Pyke-Nott.
Emil Ackerman and John Pyke-Nott say CMBS lenders took a beating during the financial crisis and in an attempt to avoid mistakes made in the past, commercial lenders adopted the debt yield ratio as a benchmark to determine the appropriate amount of commercial loan dollars for any one project according toEmil Ackerman and John Pyke-Nott.