What do NOI, cap rate, DSCR, and debt yield tell me?

Define the income before calculating a ratio

Start with the operating record and identify the period. Distinguish rent required by the leases, rent actually collected, other income, vacancies, and expenses. Do not combine historical collections with unverified future rent and call the result current performance.

Ask the lender and financial team to specify how they define NOI and which adjustments or reserves apply. Keep the property operating statement, the lender’s underwritten schedule, and your cash forecast separate when they use different definitions. The OCC discusses those distinctions and underwriting measures in its CRE handbook. See source 1.

NOI is the starting point, not the distribution

For your property, support income with leases and collections and support expenses with records and current quotes. Identify unpaid expenses, work outside the operating schedule, and the reserve policy. Do not use zero for a management or maintenance cost simply because the seller handled it personally.

Keep the four measures distinct

The OCC states the DSCR and debt-yield formulas and describes direct capitalization as NOI divided by an appropriate cap rate. These definitions do not supply a lender’s approval threshold or the appropriate market rate for your property. See source 1.

Read a cap rate with the underlying income

Ask whether the income is actual, underwritten, or projected. Then ask whether the denominator is the asking price, contract price, an estimate of value, or another amount. A displayed percentage without those definitions is incomplete.

For direct-capitalization sensitivity, use more than one expressly illustrative rate and make the input clear. A calculated value is only as supportable as the selected NOI and capitalization rate. Request the actual comparable and property evidence before using a result for pricing.

DSCR depends on the actual loan structure

Obtain the payment schedule and calculate annual debt service consistently with the lender’s definition. Ask whether the proposed covenant uses property NOI, another cash-flow measure, or a defined adjustment. Verify when compliance is tested and what happens if the threshold is not met.

There is no universal approval ratio supplied here. Ask the lender for its requirement for this property and borrower. Also read the rate structure and maturity: coverage at the initial payment does not establish the terms of a future refinance.

Debt yield gives a different view of leverage

Use the actual proposed loan amount as the denominator. Debt yield does not depend on the payment calculation, so it should not be confused with DSCR. Confirm the lender’s underwriting definition and required minimum rather than borrowing a threshold from another deal.

Read debt yield alongside the full loan structure. It does not describe interest-rate resets, guarantees, maturity, prepayment costs, or the owner’s capital commitments. Those remain document and underwriting questions.

Run a documented sensitivity

• Recalculate using verified lower collections or vacancy scenarios.
• Include the actual lease-expiration and concession schedule.
• Use quoted insurance and property expenses.
• Price known capital work and identify the required cash.
• Test the lender’s actual rate and maturity provisions.
• Keep a refinancing case separate from a committed financing agreement.

Label scenarios as hypothetical and identify the basis for every change. The purpose is to see which inputs drive the decision, not to make the model appear precise. If the acquisition needs a future improvement or refinance to work, put that dependency in plain language.

What to request from the seller and lender

From the seller, request leases, collections, operating records, expense support, and known capital requirements. From the lender, request its NOI definition, debt-service schedule, leverage constraints, covenants, maturity, guarantees, and approval conditions.

Have the broker and financial team reconcile the same property under the same period and definitions. When two reported metrics differ, trace the inputs before deciding which number to rely on.

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