1.25x. Before most commercial lenders commit a dollar to an income-producing property, they check whether the property's income covers the proposed debt by at least 1.20 to 1.25 times — and that ratio, as often as any other number, decides how much a building can actually borrow.

Five numbers drive the answer, and they build on one another: net operating income, the cap rate, loan-to-value, the debt service coverage ratio, and debt yield. Learn how lenders read each one and you can estimate your own loan amount before you ever fill out an application.

Number One: Net Operating Income

NOI is the property's income after vacancy allowances and operating expenses — taxes, insurance, management, maintenance — but before debt payments and income taxes. Everything else in this article is a function of it, which is why lenders reconcile it line by line against trailing-12 statements, the rent roll's in-place leases, and market expense benchmarks. An expense line that looks unusually low gets adjusted upward toward reality; a rent that sits above market gets trimmed. Underwriters want the income the building produces today under normal management — nothing aspirational, nothing temporarily propped up. Treat capital expenditure items with care, too: lenders differ on whether reserves for replacements sit above or below the NOI line, and the choice moves valuations by tens of thousands. Ask which convention the lender uses before you argue about value.

Number Two: The Cap Rate

The cap rate converts income into value: value equals NOI divided by the cap rate. At a 7.5% cap rate, $240,000 of NOI values the property at $3.2 million. Appraisers derive cap rates from recent comparable sales — same market, same asset type, similar condition — and cap rates move. Shift that rate from 7.5% to 8.25% and the same $240,000 of income supports $2.91 million: a difference of roughly $290,000 from three-quarters of a percentage point. That is the power of this number, and the reason appraisals sometimes land lower than owners expect even when nothing about the building changed.

Two forces move cap rates: financing costs and risk appetite. When borrowing costs rise, cap rates tend to expand, which lowers values even when rents hold steady. When a market's fundamentals tighten — new employers, population growth, constrained supply — cap rates compress, and values climb without a single rent increase. Two similar buildings in different markets can appraise very differently on the same day.

Number Three: Loan-to-Value

Lenders limit the loan to a share of value. Stabilized commercial properties commonly support 65% to 75%, though strong assets and veteran borrowers occasionally stretch a bit further. On a $3.2 million value at 70%, the loan tops out at $2.24 million; the rest is your equity. Two caveats shape the math in practice. First, acquisitions are typically underwritten at the lower of appraised value or purchase price — if you negotiated a price below appraised value, the loan still sizes against the purchase price, so the discount becomes equity rather than extra leverage. Second, lenders distinguish between as-is and as-stabilized values, occasionally sizing exposure against a pinned as-is number while underwriting the finished state. For most deals, though, LTV sets the first ceiling, and everything else refines it. This is also the framework behind most commercial real estate loans.

Number Four: DSCR

The debt service coverage ratio asks a simpler question: does the income cover the payment? Annual NOI divided by annual debt service — principal and interest — commonly needs to clear 1.20 to 1.25x. Amortization matters here: a 25-year schedule carries a higher payment than a 30-year schedule, and the ratio moves with it. When coverage fails, lenders solve backward. Maximum annual debt service equals NOI divided by the required floor, and the maximum loan is whatever payment that supports. This is the number that quietly shrinks loans when rates rise — and it is the same framework behind DSCR loans built for investment properties, where the property's income does the qualifying work. One practical consequence: on the same property, a lender offering a 30-year amortization can underwrite a noticeably larger loan than one insisting on 25 years — same rate, same income, different answer.

Number Five: Debt Yield

Debt yield strips out value entirely: NOI divided by the loan amount, commonly with floors around 9% to 10%. Why check it when an appraiser has already pinned a value? Because cap rates compress and expand, and a loan that looked modest against last year's value can look larger against a shakier valuation. Debt yield is the lender's backstop — a "what if we own it" test that ignores what the market says the building is worth and asks what income return the debt itself produces. $240,000 of NOI against a $2.24 million loan is a 10.7% debt yield: comfortable, but not unlimited room.

The Numbers on One Building

Here is how all five interact on a single deal — the kind of file a lender like Tesni, LLC takes from application to term sheet.

Take a property with $240,000 of NOI appraised at $3.2 million on a 7.5% cap rate. At 70% LTV, the loan would be $2.24 million. Now run the coverage test. On a 30-year amortization at a 7.5% quoting rate, that loan carries payments of roughly $15,700 a month — about $188,000 a year — leaving DSCR at roughly 1.28. It clears the 1.25 floor, barely, and the deal works.

Now change one variable: the quoting rate is 9%. The same $2.24 million carries payments of roughly $18,000 a month, or about $216,000 a year, and coverage falls to 1.11 — below the floor. The lender does not argue; it solves backward. At a 1.25 requirement, this property supports $16,000 a month of debt service, which translates to a loan of about $1.99 million — roughly 62% LTV, not 70%. Debt yield at that number sits near 12%, comfortably above the usual floors. But the loan size is what it is: the smallest answer among the tests wins.

The gap between the two outcomes — about $250,000 of loan proceeds — is equity the borrower must fill, or income the property must earn. There is no third option that avoids a different lender or a different rate.

Two lessons fall out of that arithmetic. Small movements in rate or income produce large movements in loan amount — which is why the stress-tested number, not the best case, is the one that funds. And no negotiation moves these outputs. Only three things do: more income, less leverage, or a stronger market. If you want the short version of the questions underwriters actually ask, our FAQ covers the ones that come up most.

Reading Your Own Numbers Before Anyone Else Does

Three habits make you harder to surprise. Use trailing-12 actuals, not a single strong month. Benchmark expenses against market norms for your asset type instead of what you happen to spend. And run every scenario against the stress case — a higher rate, softer rents — not just the comfortable one. The numbers you cannot move are the ones worth knowing first.

This week, pull three documents — trailing-12 operating statements, the current rent roll, and your loan balance — and run the five numbers on your own property before anyone else does. When you want a real read against live market terms, send those three documents to our team at Tesni, LLC, and we will show you where your loan amount actually lands.