What is debt yield protection and how would you test for it in a model?

• A. It ensures equity returns are maximized; test by simulating cap rates.
• B. Debt yield ensures NOI covers debt amount; test by calculating NOI / loan amount; maintain a minimum threshold across scenarios.
• C. It's a tax credit; test by accounting for LIHTC.
• D. It relates to occupancy; test by occupancy rate only.

Answer: (B)

Debt yield protection is a safeguard that ties the property's income to the loan balance, giving lenders a clear measure of risk independent of timing aspects like debt service. It uses the ratio of net operating income (NOI) to the loan amount to gauge how much income the asset generates relative to the debt outstanding.

In a model, test it by calculating debt yield as NOI divided by the loan amount (NOI / loan amount). Then verify that this ratio stays above a minimum threshold across scenarios that affect NOI or the loan balance (for example changes in rents, occupancy, operating expenses, or loan amortization). If the debt yield remains above the required floor in all scenarios, the protection is satisfied. If it drops below, you’d need to adjust financing terms, reserves, or underwriting assumptions.

For context, this is different from debt service coverage (which compares NOI to annual debt payments) and isn’t about tax credits or occupancy alone.