Debt yield, not appraised value, matters
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.
