A commercial real estate loan is limited by the most restrictive underwriting test. For an income-producing property, that usually means comparing debt-service coverage (DSCR), loan-to-value (LTV), and any minimum debt yield. The lowest supported amount is a starting ceiling, before other lender limits, closing costs and reserves.
A larger appraisal does not solve an income shortfall. A lower payment does not remove a lender's debt-yield requirement. Identify the test that limits your deal before trying to increase proceeds.
How DSCR, LTV and debt yield work together
Net operating income (NOI) is property income after operating expenses, before mortgage debt service and owner income taxes. The lender may adjust vacancy, management fees, repairs, property taxes, insurance and reserves. A seller's stated NOI and a lender's underwritten cash flow can differ, so reconcile the inputs before comparing loan amounts.
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| Test | Formula | What it measures |
|---|---|---|
| DSCR | Annual underwritten NOI ÷ annual debt service | Whether property income covers the payments used in underwriting. |
| DSCR loan limit | NOI ÷ minimum DSCR ÷ annual debt-service constant | The loan supported by cash flow under the assumed repayment structure. |
| LTV loan limit | Lender-accepted property value × maximum LTV | The lender’s advance relative to collateral value. |
| Debt-yield loan limit | NOI ÷ minimum debt yield, expressed as a decimal | Income relative to the loan balance, independent of payment amortization. |
The OCC's Commercial Real Estate Lending handbook discusses DSCR, debt yield, value analysis and lender underwriting standards. It does not establish the hypothetical thresholds used below as available Stonehaven terms.
What is an annual debt-service constant?
The annual debt-service constant is annual principal-and-interest debt service divided by the original loan amount. It converts a payment limit into a loan amount. For example, an 8% constant means $80,000 of annual debt service for each $1 million borrowed. It is a calculation assumption, not an interest rate, APR or financing quote. A lender's underwriting constant may reflect stressed payments rather than the initial payment.
Example: sizing a loan on a $6 million property
Assume an income-producing commercial property has $400,000 of annual underwritten NOI and a lender-accepted value of $6 million. For this educational example only, use a 1.25x minimum DSCR, an 8% annual debt-service constant, a 70% maximum LTV and a 9% minimum debt yield. These are illustrative assumptions, not a program or commitment.
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| Sizing test | Calculation | Supported loan |
|---|---|---|
| DSCR | $400,000 ÷ 1.25 = $320,000 annual debt service; $320,000 ÷ 0.08 | $4,000,000 |
| LTV | $6,000,000 × 70% | $4,200,000 |
| Debt yield | $400,000 ÷ 0.09 | $4,444,444, rounded |
| Lowest result | The DSCR limit is the most restrictive. | $4,000,000 before other limits |
At a $4 million loan, the modeled DSCR is 1.25x, LTV is approximately 66.7%, and debt yield is 10%. Although the value supports $4.2 million, cash flow supports only $4 million under the payment assumption. Asking for a higher appraisal alone would not increase this modeled loan.
Loan amount is not net cash. On a purchase, subtract the loan from the acquisition and closing budget to estimate required equity. On a refinance, deduct the existing payoff, financing costs and required reserves before calling anything cash out. The commercial refinance guide shows a proceeds shortfall example.
Which change actually increases proceeds?
Change one assumption at a time to find the constraint. The following alternatives keep every base-case input unchanged except the stated change.
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| Change from the base case | New lowest loan limit | Why it changes |
|---|---|---|
| NOI falls to $360,000 | $3,600,000 | DSCR remains the constraint: $360,000 ÷ 1.25 ÷ 0.08. |
| Value falls to $5,500,000 | $3,850,000 | LTV now binds: $5,500,000 × 70%. |
| Minimum debt yield rises to 11% | $3,636,364, rounded | Debt yield now binds: $400,000 ÷ 0.11. |
| Value rises to $6,500,000 | $4,000,000 | The higher LTV ceiling does not change the DSCR ceiling. |
- If DSCR binds: verify collections, expense adjustments and the repayment assumption. A longer amortization can change payment-based sizing, but it may not change the lender's stressed test or debt-yield floor.
- If LTV binds: review the valuation basis and credible comparable evidence. More borrower equity or a smaller payoff may be needed; the appraisal cannot be assumed upward.
- If debt yield binds: a lower payment does not change NOI divided by the loan. Supportable NOI or a lower balance must address the gap.
Use the commercial loan calculator for a first-pass DSCR and LTV comparison. Its output does not add a lender-specific debt-yield test, sponsor requirements or approval. Read the calculation methodology before applying the result to a live deal.
Construction loan sizing adds costs, draws and the exit
A vacant teardown site has no stabilized rental NOI today. For ground-up construction financing, the review also examines eligible project costs, land equity, construction budget, completion value, draw timing and the sale or refinance exit. LTC is loan divided by lender-recognized project cost; LTV is loan divided by lender-accepted value. They are not interchangeable.
Financing 100% of an approved construction budget is not automatically 100% of total project costs or completed value. Acquisition, existing liens, interest reserves, fees and excluded costs must be identified separately. A fix-and-flip project likewise needs a renovation budget and supportable resale plan. If the plan is to hold, model the permanent loan before relying on it to repay construction or bridge financing.
What to send for a commercial loan-sizing review
- Property: address, asset type, units or square footage, occupancy and ownership structure.
- Income: current rent roll, trailing 12-month operating statement, recent collections and material lease expirations.
- Value and request: purchase contract or value estimate, requested loan and use of proceeds.
- Existing debt: balance, maturity, payment structure and any known prepayment cost.
- Business plan: repairs, lease-up assumptions, project budget and intended hold or sale.
- Sponsor: relevant experience, available equity and liquidity after closing.
Is commercial DSCR the same as a rental-property DSCR loan?
Not always. This guide uses annual property NOI divided by debt service for commercial underwriting. Many 1–4 unit DSCR rental-loan programs instead compare eligible rent with housing payments under their own rules. Do not insert gross rent into the commercial NOI formula or mix the two methods.
Does clearing these ratios guarantee approval?
No. Property condition, environmental issues, tenant concentration, sponsor capacity, title, market, lender policy and documentation still matter. Stonehaven uses the initial sizing to discuss a realistic request with third-party lenders; the lender makes the credit decision.