Debt yield, not appraised value, matters
By Joel Ross , President at Citadel Realty Advisors
We used to use debt service coverage ratio to measure the risk of a loan and to size the loan proceeds. Now the mantra is debt yield. That is, net operating income divided by 14% to determine proceeds. In short, NOI has to be equal to a 14% yield on the amount of debt proceeds. The interest rate is not then 14%. It is simply a way for the lender to measure how much spread there is between the rate he is going to charge (say 6%) and 14% so he can measure his risk of default. The lower the debt yield the greater the risk.
Joel Ross is principal of Citadel Realty Advisors, successor to Ross Properties, the investment banking and real estate financing firm he launched in 1981. A Wharton School graduate, Ross began his career on Wall Street as an investment banker in 1965. A pioneer in commercial mortgage-backed securities, Ross, along with Lexington Mortgage, and in conjunction with Nomura, effectively reopened Wall Street to the hotel industry.More from Joel Ross