The relationship between a property’s net operating income (NOI) and the mortgage loan amount is expressed through a financial metric used in commercial real estate. It represents the property’s ability to cover its debt service. As an example, a property with an NOI of $500,000 and a mortgage of $5,000,000 would exhibit a calculation result of 10%. This percentage suggests the return the lender would receive if they took ownership of the property.
This ratio is crucial for lenders, particularly in the realm of commercial mortgage-backed securities (CMBS). It provides a snapshot of risk, indicating how easily a property can meet its debt obligations. Historically, it has been employed as a relatively stable and less easily manipulated measure compared to other metrics during real estate evaluations, offering a more reliable risk assessment tool.