Difference between Debt Service Coverage Ratio and Debt Yield

I think there's some nuance I'm missing here, could someone help break it down for me?

Debt yield: net operating income/total loan amount

Debt service coverage ratio: net operating income/total debt service

Thanks!

 

Could be wrong here - but it's analogous to how cap rates are a proxy for unlevered returns. If you assume NOI is steady state and ignore the impact of below the line items, downtime, structural vacancy etc. then your cap rate = your unlevered returns. Now your CoC return is equal to your unlevered returns if you assume entry cap = exit cap and entry NOI = exit NOI 

Now extend the same idea to a DY since it's effectively the lender version of a cap rate 

 
Most Helpful

Yes - is helpful to know the relationship between mortgage constant, debt service coverage ratio, and debt yield and converting them.

Say a lender uses 7%/30-yr for calculating debt service in their underwriting or term sheet. That is equivalent to a 7.98% mortgage constant (=PMT(7%/12,30*12,-1)*12)

  • Lender wants a minimum 1.25x DSCR. That is equivalent to a 10% debt yield (1.25x * 7.98%). 
  • Or, if given 10% DY, solve for DSCR by dividing DY by mortgage constant (10% / 7.98% = 1.25x).

Also can be used for figuring out max loan amount based on a given NOI. Say NOI is $5MM and lender is using a 7.98% constant. 

  • Max loan sized to 1.25x (or 10% DY, from above) = $50 million ($5,000,000 / 10%)  or ($5,000,000 / (7.98% / 1.25x))

Both DY and DSCR are useful and should be taken into account. Debt yield is useful because it's apples to apples, whereas DSCR depends on the mortgage constant being used, which varies from lender to lender. If a mortgage broker tells me they have a deal with a 1.25x DSCR, that's not very helpful because we're probably using different interest rates. However DY doesn't take into interest rates, which is obviously important these days. Two years ago when rates were low, a 7% DY looked solid and produced a fine DSCR. But with rates higher today, that same 7% DY is <1.00x. 

 

Est fuga aut alias atque fuga cumque. Vel deleniti quia reiciendis incidunt qui est corrupti aut. Qui pariatur dolor qui molestiae.

Nisi quaerat et placeat magnam in sint. Quasi minima harum eligendi impedit ipsa non illum et. Sint sed illo soluta doloribus alias dolorem est aut.

Facilis aut et dolor quia aut et voluptas ut. Assumenda alias adipisci quos sed consequatur non tempora. Eos quis doloremque delectus vitae ea doloremque dolor neque.

Career Advancement Opportunities

May 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 04 97.1%

Overall Employee Satisfaction

May 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

May 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

May 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (20) $385
  • Associates (88) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (67) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
GameTheory's picture
GameTheory
98.9
6
kanon's picture
kanon
98.9
7
dosk17's picture
dosk17
98.9
8
CompBanker's picture
CompBanker
98.9
9
Linda Abraham's picture
Linda Abraham
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”