Commercial Real Estate Underwriting: Key Formulas and Calculations

Getting a commercial real estate deal to the finish line almost always requires financing, and that means passing the rigorous process of lender underwriting. Commercial underwriting is where the rubber meets the road—where a lender scrutinizes every aspect of your deal to assess its risk. To succeed, you need to stop thinking like an investor focused on upside and start thinking like a lender focused on downside protection. This guide covers the key commercial underwriting formulas lenders use, their typical requirements for 2026, and how to structure your deal to get approved.

Investor Analysis vs. Lender Underwriting: A Tale of Two Perspectives

As an investor, your analysis is optimistic. You focus on potential rent growth, value-add opportunities, and maximizing your return. A lender's underwriting is pessimistic. They focus on historical performance, downside scenarios, and ensuring the property can comfortably cover its debt even if things go wrong. Lenders will often use more conservative assumptions than you, resulting in a lower underwritten NOI and, consequently, a smaller loan amount.

The Lender's Gauntlet: 5 Key Underwriting Formulas

Lenders use a set of core metrics as hurdles. Your loan amount will be sized to meet the most restrictive of these constraints. You must pass them all. For a complete overview of these metrics, see our guide to the 7 essential CRE metrics and comparison of debt yield vs DSCR.

1. Debt Service Coverage Ratio (DSCR)

DSCR is the lender's primary cash flow test. It ensures the property's income is sufficient to cover the mortgage payments with a healthy buffer. A failure here is a non-starter.

• Formula: Net Operating Income / Annual Debt Service
• Minimum Requirement: Typically 1.25x
• Why it matters: It proves the property can afford the loan on a month-to-month basis. Use our DSCR Calculator to check this first.

2. Debt Yield

Debt Yield is the lender's backstop against market volatility. It measures their "what if" return if they had to foreclose. Unlike DSCR, it's unaffected by low interest rates or long amortizations, making it a pure measure of risk.

• Formula: Net Operating Income / Total Loan Amount
• Minimum Requirement: Typically 9-10%
• Why it matters: It prevents borrowers from over-leveraging just because rates are low. Our Debt Yield Calculator can help you pass this modern hurdle.

3. Loan-to-Value (LTV)

LTV limits the loan amount based on the property's appraised value. It ensures the borrower has a meaningful amount of equity in the deal, reducing the lender's risk if property values decline.

• Formula: Loan Amount / Appraised Property Value
• Maximum Limit: Typically 75% for most property types.
• Why it matters: It dictates the size of your down payment. You can determine your equity requirements with the LTV Calculator.

4. Breakeven Occupancy

Lenders want to see a significant margin of safety. Breakeven occupancy shows them how much vacancy the property can absorb before it can no longer pay its bills (including their loan). A high breakeven is a major red flag.

• Formula: (OpEx + Debt Service) / Gross Potential Income
• Maximum Limit: Lenders are wary of anything above 85%.
• Why it matters: It's a powerful stress test of the deal's operational risk. Model your safety margin with the Breakeven Occupancy Calculator.

5. Stabilized Net Operating Income (NOI)

This is the starting point for everything. Lenders will create their own underwritten NOI, often using higher vacancy rates and expense assumptions than the borrower. They will almost always use historical figures, not future projections.

• Formula: Effective Gross Income - Operating Expenses
• Why it matters: The lender's underwritten NOI will almost certainly be lower than yours. Be prepared for this by building your own realistic projections with our NOI Builder.

Lender Requirements Cheat Sheet (2026 Averages)

Common Reasons Deals Fail Underwriting

To succeed in commercial real estate, you must underwrite your own deals with the same conservative lens a lender would use. By calculating these key formulas upfront, you can identify potential roadblocks early, adjust your offer and financing structure accordingly, and present a deal that is built to be approved.