How lenders size a commercial real estate loan
A lender does not approve a loan amount first and check the property second. It runs the property through several tests and lends the smallest amount that passes all of them. The test that produces the smallest loan is the binding constraint, and it tells a borrower where the real limit on proceeds sits.
The 4 sizing tests
Loan-to-value caps the loan as a share of the property's value. Debt service coverage caps the loan so that net operating income covers the annual payment by the lender's required margin. Debt yield caps the loan so that net operating income is a minimum percentage of the loan amount, independent of rate. Loan-to-cost caps construction and renovation loans as a share of the total project budget.
Worked example
Take a property valued at $10,000,000 with $650,000 of net operating income, a 7.00% rate, and a 30-year amortization. At a 65% maximum loan-to-value the loan is $6,500,000. At a 1.25x minimum DSCR the loan is $6,513,328. At a 9.0% minimum debt yield the loan is $7,222,222. The lender would size to $6,500,000, which is set by loan-to-value.
In this example the loan-to-value and coverage results sit close together, so a lower rate or higher income would not add much. Raising proceeds would require a higher value, a lender with a higher leverage limit, or subordinate capital such as mezzanine debt or preferred equity.
Using the result
The thresholds in the calculator are editable example values. Real limits vary by property type, market, sponsor, loan program, and lender, and they move with the credit cycle. Capital Partners tracks lender criteria by property type, structure, size, and geography, which is how a principal identifies the lenders whose limits fit the request.
Rate notes from Capital Partners
Leave your email and a principal will send commentary when benchmark rates move enough to change what lenders are quoting.
Common questions
How much can I borrow on a commercial property?
The loan is the smallest amount that passes every test the lender applies, usually loan-to-value, debt service coverage, and debt yield, plus loan-to-cost for construction. Enter the property value, net operating income, and your loan terms to see which test limits proceeds.
What is a binding constraint in loan sizing?
It is the sizing test that produces the smallest loan. Improving any other test does not increase proceeds. A borrower who wants a larger loan has to improve the binding test or find a lender whose limit on that test is higher.
Do lenders use purchase price or appraised value?
On an acquisition most lenders use the lower of the purchase price and the appraised value. On a refinance they use the appraised value.
Can I borrow more than the calculator shows?
Sometimes. Different lenders set different limits, and subordinate capital such as mezzanine debt or preferred equity can fill the gap between senior proceeds and the total need. A principal can review which structures fit the property.