{"id":412,"date":"2021-05-30T15:22:52","date_gmt":"2021-05-30T20:22:52","guid":{"rendered":"http:\/\/agcus.net\/?p=412"},"modified":"2026-02-04T19:15:00","modified_gmt":"2026-02-05T01:15:00","slug":"commercial-loans-and-the-relaxation-of-the-debt-yield-ratio","status":"publish","type":"post","link":"http:\/\/streamapse.com\/TAR\/?p=412","title":{"rendered":"Commercial Loans and the Relaxation of the Debt Yield Ratio"},"content":{"rendered":"

First a correction. \u00a0A few days ago, I wrote a blog article about how deflation is sweeping the world<\/a>. \u00a0In that article, I mentioned that deposit rates in Germany are slightly positive. \u00a0I am pretty sure that this statement was wrong.<\/p>\n

Listening to Bloomberg today, I just discovered that the yield on ten-yield German bunds is a negative 0.46%. \u00a0The world is deflating so fast that this yield fell by a full 0.02% in a single day. \u00a0That’s a pretty big move. \u00a0No wonder the Fed is trying to get ahead of deflation in America.<\/p>\n

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I couldn’t find the current yield on bank C.D.’s in Germany right now, but they simply must<\/em> be negative because German banks are making hundreds of billions of dollars in commercial loans to large German businesses at a negative<\/em><\/strong> interest rate.<\/p>\n

Holy crappola! \u00a0Is this a wild and crazy world or what? \u00a0This negative yield means that if you want the safety of loaning money to the German government, you have to pay the German government almost one-half of one percent per year<\/strong><\/em> for the privilege.<\/p>\n

Now on to Today’s Training:<\/strong><\/p>\n

The Debt Yield Ratio<\/a> is different from the Debt Service Coverage Ratio<\/a>.<\/p>\n

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The Debt Service Coverage Ratio<\/a> is a financial ratio, used when making commercial real estate loans, designed to determine if the property generates more than enough net income<\/strong><\/em> (typically 1.25x) to make the loan payments on the proposed loan.<\/p>\n

The Debt Yield Ratio<\/a>, in contrast, is a financial ratio, used when making commercial loans, designed to make sure that the amount of the new commercial loan never gets too large in relation to the net income thrown off by the property – no matter how low interest rates get<\/strong>. \u00a0This latter point is critical.<\/p>\n

In the lead-up to the financial crisis in 2008, conduits brought amazingly low interest rates on commercial loans to prime commercial real estate. \u00a0Because interest rates were so low (in comparison to prior years) in 2005, 2006, and 2007 that investors were able to achieve historically sky-high loan-to-value ratios, sometimes as high as 80% loan-to-value!<\/p>\n

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Because the buyers of commercial real estate could now buy trophy properties with 80% leverage, thousands of wealthy investors poured into the trophy commercial real estate market. \u00a0Up-up-up went prices. \u00a0Down-down-down went cap rates. \u00a0The property valuations and the size of the loans against them went crazy.<\/p>\n

Bam!<\/strong><\/em> \u00a0Then the Great Recession struck.<\/p>\n

Down-down-down went the values of trophy commercial real estate. \u00a0Borrowers defaulted on their huge CMBS loans. \u00a0The bonds backed by commercial mortgage-backed securities<\/strong><\/em> (IOU’s backed by huge pools of commercial real estate loans) took horrendous losses.<\/p>\n

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After taking horrendous losses, the buyers of commercial mortgage-backed securities lost their appetite for these bonds. In\u00a02009, the CMBS industry contracted almost out of existence. \u00a0Dozens of conduit lenders<\/strong><\/em> (specialized mortgage companies originating commercial loans destined for securitization) closed their doors. \u00a0It was a bloodbath. \u00a0An entire industry – the conduit industry – was almost wiped off the face of the earth.<\/p>\n

Finally – slowly – the appetite of CMBS buyers returned, but they were determined to never again invest in bonds backed by commercial loans that were far too large in comparison to the amount of net income being generated by underlying the property.<\/p>\n

The result was the creation of the Debt Yield Ratio. \u00a0At first, a conduit could not originate a CMBS loan with a debt yield of less than 10%. \u00a0This kept most conduit loans at less than 60% loan-to-value.<\/p>\n

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Why would any borrower be content with a $7 million loan against his office building if the loan-to-value ratio was only 58%? \u00a0The answer was that the conduits were the only lenders making non-recourse commercial loans<\/a>.<\/p>\n

Okay, life companies were also making non-recourse commercial loans, but their properties had to be breathtakingly beautiful. \u00a0Conduits, on the other hand, would make large, non-recourse, commercial loans on average-looking commercial properties.<\/p>\n

The new wave of CMBS loans performed spectacularly in 2011, 2012, and thereafter, so the appetite of CMBS investors became ravenous. \u00a0More and more exceptions to the 10% minimum Debt Yield Ratio were made until 9% became the norm.<\/p>\n

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I am sure that conduit Debt Yield Ratios have fallen below 9%. \u00a0Does anyone out there work for a conduit? \u00a0What are conduit Debt Yields today?<\/p>\n

This article was triggered by the rate sheet of a money center bank<\/a>. \u00a0Now this bank is a portfolio lender, rather than a conduit lender, but they recently publicized a minimum Debt Yield Ratio of 5% for apartments, 6% for commercial, and 8% for multifamily. \u00a0Wow. \u00a0The market is truly ravenous for commercial loans.<\/p>\n

 <\/p>\n

 <\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

First a correction. \u00a0A few days ago, I wrote a blog article about how deflation is sweeping the world. \u00a0In…<\/p>\n","protected":false},"author":1,"featured_media":458,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15,1],"tags":[5,16,47,107,48],"class_list":["post-412","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-insights","category-latest-news","tag-commercial","tag-loans","tag-ratio","tag-relaxation","tag-yield","entry","double"],"_links":{"self":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/412","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=412"}],"version-history":[{"count":1,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/412\/revisions"}],"predecessor-version":[{"id":17685,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/412\/revisions\/17685"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/media\/458"}],"wp:attachment":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=412"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=412"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=412"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}