Three tests size every senior CRE loan, and the lender lends the lowest. Learn how to read which one is limiting your proceeds — and what actually moves it.
A senior commercial lender runs three independent tests, each producing a maximum loan amount, and lends the lowest of the three. The test behind that lowest number is your binding constraint — the one actually limiting your proceeds. Knowing which it is tells you what to do about it.
The three tests at a glance
| Test | Formula | Protects against | Tends to bind when… |
|---|---|---|---|
| DSCR | NOI ÷ annual debt service | Payment shock — income not covering debt | Rates are high |
| Debt Yield | NOI ÷ loan amount | Over-leverage from cheap rates / inflated values | Rates are low |
| LTV | Loan ÷ appraised value | Too little equity cushion | Cap rates are low |
Each test guards against a different risk, which is why lenders use all three rather than picking one.
Why the binding constraint moves
The same property can be limited by different tests depending on the market:
- High-rate environment. Higher rates mean higher debt service, so DSCR caps the loan first. Debt yield and LTV usually have slack.
- Low-rate environment. Cheap debt makes DSCR easy to pass at high leverage, so debt yield holds the line on income and becomes the limit.
- Low cap rate / high value. When a property trades at a low cap rate, value is high relative to income. LTV would allow a big loan, but the income tests cap it well below the LTV ceiling.
A worked example
Take a stabilized property with $1,000,000 NOI and a $16,700,000 value (6.0% cap rate). Lender minimums: DSCR 1.25x, debt yield 9.0%, LTV 70%.
At 7.0% interest, 30-year amortization:
- By DSCR: ~$10.0M ← lowest, so DSCR binds
- By debt yield: $11.1M
- By LTV: $11.7M
Now drop the rate to 5.5%, holding everything else:
- By DSCR: ~$12.2M
- By debt yield: $11.1M ← lowest, so debt yield binds
- By LTV: $11.7M
Same property, same value, same income — and the binding constraint flipped from DSCR to debt yield purely because the rate changed. This is exactly why you can’t size a deal off a single rule of thumb. The Loan Sizing Calculator shows all three at once and flags which binds.
What to do once you know which binds
- DSCR binds: proceeds are limited by the payment. Levers that help — a longer amortization, an interest-only period, a lower rate, or higher NOI. A higher appraisal does nothing.
- Debt yield binds: proceeds are limited by in-place income relative to the loan. The only real lever is higher NOI; rate and value don’t move it.
- LTV binds: proceeds are limited by value. A stronger appraisal or more equity is the path; the income tests already have room.
Chase the wrong lever and you waste time and money. If debt yield binds, paying for a higher appraisal won’t add a dollar of proceeds.
How Mercury helps
Identifying the binding constraint — and structuring the deal around it — is the core of what we do on the debt side. We model all three tests for your property, tell you which one limits the loan, and run a competitive lender process where we’re licensed or exempt. Start with the Loan Sizing Calculator, then discuss your financing scenario.
Frequently asked questions
What does “binding constraint” mean?
It’s the one of the three tests (DSCR, debt yield, LTV) that produces the smallest loan, and therefore sets your actual proceeds.
Can two constraints bind at once?
They can be close, and a small change in inputs flips which one limits. When two are nearly equal, both effectively govern, and improving only one won’t help much.
Why doesn’t a higher appraisal always increase my loan?
Because a higher value only helps if LTV is your binding constraint. If DSCR or debt yield binds, the loan is capped by income, not value.