In development leasing scenarios, longer lease-up periods typically have what effect on debt yield and loan risk?

• A. Increase debt yield since NOI is front-loaded.
• B. Increase equity yield.
• C. No change to returns.
• D. Lower debt yield because NOI is lower during lease-up.

Answer: (D)

Debt yield is a measure that lenders use to gauge loan risk, calculated as net operating income divided by the loan amount. In a lease-up or development period, occupancy is still ramping up, so NOI remains depressed due to vacancies, concessions, and ongoing operating inefficiencies. The loan amount is fixed, so a lower NOI pushes the debt yield down. A lower debt yield signals higher risk to the lender because there’s less income to cover the loan if market conditions worsen or vacancies persist longer than expected. Put simply, the longer the lease-up lasts, the longer NOI stays low, and the lower the debt yield becomes, increasing loan risk. Once stabilization occurs and NOI climbs, debt yield would improve, but the risk window during lease-up is the critical period. The other options don’t fit because equity yield isn’t the focus here, and the situation does involve a change in leverage risk as NOI is suppressed during lease-up.