FEATURE
WHAT IS THE DEBT YIELD RATIO THAT BANKS ARE NOW USING? By Edward Brown, Pacific Private Money
F
or many years, banks have
bank would also look at the Loan
amortization periods] as well as
used
Debt
Service
to Value [LTV] in conjunction with
requesting a lower interest rate.
Ratio
[DSCR]
the DSCR. Presuming the value
The combination of increasing the
as a way to access risk regarding
of the apartment building was
amortization period and lowered
the viability of a borrower to
$1,000,000, a 65% LTV loan would
interest rates allowed borrowers
make mortgage payments after
be acceptable to most banks.
to
subtracting
expenses
In previous years, a lot of banks
initially requested in order to meet
from income. The larger the ratio,
were willing to allow a DSCR as
the more stringent 1.35 DSCR.
the more comfortable the bank
low as 1.00, meaning that the
The
felt making a loan. For example,
NOI exactly covered the banks’
let’s presume that a borrower
the
Coverage
normal
borrower
the
they
with
the
above
negotiations
[from
the
bank’s
monthly payment; however, after
perspective]
is
was considering applying for a
The
2008,
was still at the same LTV, and,
$650,000
over
banks pulled back substantially
in fact, one could argue that the
20 years at 4% with a bank. The
in their lending practices and
bank was not compensated for
monthly payment would be about
raised the DSCR to 1.15, then 1.25,
the benefit bestowed upon the
$3,939 per month. If the apartment
and then many settled on 1.35.
borrower [lowering the rate and/
building grossed $8,000 and the
This severely constrained many
or stretching out the amortization
normal
$3,000
borrowers’ ability to finance their
period]. Just because the borrower
per month, the Net Operating
real estate projects. They either
met the new DSCR requirement did
Income [NOI] would be $5,000 per
had to come up with more cash, or
not put the bank in a safer position.
month. The DSCR would be 1.27
they had to negotiate for a longer
In addition, the problem with the
[$5,000/$3,939]. Of course, the
term [25 or possibly 30 year
DSCR is that it only addressed the
loan
amortized
expenses
were
Great
18 Originate Report | Dec. 2019 / Jan. 2020
Recession
in
problem
amount
that
the
bank
