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Making Sense of Debt Yield Ratios

When applying for a mortgage on your hotel, it is useful to understand the various analytical tools lenders use to evaluate the size and terms of the loans they are making. Up until a few years ago, the preferred benchmark lenders relied on was the debt coverage ratio. Recently, a new tool called the debt yield ratio came into vogue, which seems to be used by most hotel lenders today. Let’s look at both the debt coverage and the debt yield ratios and see how lenders in underwriting hotel loans use them.

Assume we are looking to refinance an existing hotel that is starting to experience improved operating results as it comes out of the recent recession. A hotel appraisal company was commissioned to perform an appraisal to project the build-up of net operating income (NOI) and to also estimate the hotel’s current market value. The following are the results from the appraisal:

Projected NOI ($000)
2011: $5,200
2012: $5,600
2013: $6,300
2014: $7,500 (Stabilized)

Estimated Current Market Value: $67,000,000

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