Differentiate debt yield from DSCR and identify when each is typically used in lending decisions.

• A. Debt yield = NOI / loan amount; independent of cap rates or financing terms; used by lenders to assess default risk; DSCR is income relative to debt service, used in loan underwriting.
• B. Debt yield = loan amount / NOI;
• C. Debt yield = cap rate / loan amount;
• D. Debt yield = NOI / equity;

Answer: (A)

The key idea is how these two metrics differ in what they measure and how they’re used in lending decisions. Debt yield looks at cash flow relative to the loan size, not to the property value or the financing terms. It is NOI divided by the loan amount, and it stays independent of cap rates or any particular loan structure. This makes it a straightforward, cross-asset gauge of default risk: it shows how much NOI the property generates per dollar of debt outstanding, allowing lenders to compare deals on a cash-flow basis.

DSCR, on the other hand, is NOI divided by the annual debt service (principal and interest payments). This ties the property’s income directly to the specific loan terms being offered and is a core underwriting measure of whether the property can actually service the debt under those terms.

So the best answer states debt yield as NOI over loan amount, independent of cap rates or financing terms, and DSCR as income relative to debt service used in loan underwriting. The other forms misstate the metrics (inverting the ratio, mixing in cap rates, or using equity) and don’t reflect how these measures are actually applied in lending decisions.