Debt yield is defined as NOI divided by loan amount. Which inputs drive it and help ensure lender risk coverage?

• A. NOI divided by property value; factors include cap rate and interest rate.
• B. NOI divided by debt service; factors include debt service coverage and interest rate.
• C. NOI divided by loan amount; control inputs include cap rate, occupancy, rent growth, and loan amount.
• D. Cash flow after taxes divided by equity; includes tax rate.

Answer: (C)

Debt yield is a measure of lender protection that compares current income to the actual debt outstanding: NOI divided by the loan amount. Because the denominator is the loan amount, the level of leverage directly affects how much cushion the lender has, while the numerator (NOI) captures the cash-flow the property can generate to service that debt.

The inputs that drive this ratio are those that influence NOI and the loan amount. Occupancy and rent growth shape future rental income and therefore NOI. Cap rate is a market signal that can influence expectations for income stability and value, indirectly conditioning the cash flow scenario the lender uses. The loan amount is the denominator, so higher leverage lowers the debt yield and tighter leverage raises it. Taken together, higher NOI (through occupancy and rent growth) and a smaller loan amount raise debt yield, strengthening perceived lender protection.

Other options don’t fit because they either replace the numerator or the denominator with a different metric. Using property value as the denominator shifts the ratio to a value-based measure, using debt service ties it to cash flow after debt obligations rather than the loan balance, and using cash flow after taxes over equity gives an return-on-equity perspective rather than a lender-focused coverage metric.