Quick answer: A commercial lender does not size your loan off the balance you owe. It runs three separate tests, loan‑to‑value, debt service coverage, and debt yield, and funds the lowest of the three. When that number lands below your payoff, the difference is cash you bring to closing. On loans maturing in 2026 and 2027 the gap is usually caused by the amortization schedule, the interest‑only period you took at origination, or a cap rate that expanded, and not by the interest rate alone.
There is a specific afternoon in this process that owners remember. The appraisal comes back, the bank sends over a term sheet, and the loan amount on it is smaller than the balance on the loan being replaced. Nothing about the building has changed. The tenant still pays. The roof is fine. The rent went up, slightly. And the lender is asking for a check.
That difference has a name in the industry. It is called a cash‑in refinance, and the polite version of the sentence is “we will need a paydown to close.” Owners almost never see it coming, because the conversation before that afternoon was about interest rates, and the rate is rarely the thing that creates the gap.
This page explains where the number actually comes from, with two worked examples carried all the way through: a 2019 loan on a net lease property and a 2016 loan with an interest‑only period. Both are the kind of deal a single owner holds in the $1 million to $20 million range, and both produce a gap for completely different reasons. If you are earlier in the process and still deciding between paths, the companion page on whether to refinance or sell before the loan matures covers the decision itself.
Your lender runs three tests and funds the lowest one
Most owners know one of these. Some know two. Very few have seen all three run against their own property at the same time, which is unfortunate, because the one that binds is often the one they never heard of.
| Test | What it measures | Typical requirement today | What it ignores |
|---|---|---|---|
| Loan‑to‑value | Loan amount against appraised value | 60% to 70% for most small‑balance commercial | Whether the income covers the payment |
| Debt service coverage | Net operating income against annual debt service | 1.20x to 1.35x, commonly 1.25x | What the property would sell for |
| Debt yield | Net operating income divided by loan amount | 9% to 11% floor | The interest rate and the amortization entirely |
The lender calculates all three, gets three different maximum loan amounts, and offers the smallest. That is the whole mechanic. Everything else is detail.
Loan to value is the one everyone knows and the one that moved most
An appraisal in 2026 is not the appraisal you got in 2019. Cap rates expanded across nearly every commercial category, which means the same income stream supports a lower value. A property producing $300,000 of net operating income was worth $5,000,000 at a 6.00% cap rate and is worth $4,137,931 at a 7.25% cap rate. The income never fell. The value did, by about 17%, because the denominator changed.
Leverage tightened at the same time. A bank that wrote 70% or 75% in 2019 frequently writes 60% to 65% today on the same asset type. Two adjustments compounding in the same direction is how a loan that was comfortable becomes a loan that will not clear.
Debt service coverage is where the rate shows up
This test divides net operating income by annual debt service and requires the result to clear a floor, usually 1.25x. It is the only one of the three that is sensitive to the interest rate, and it is also sensitive to something owners underweight badly: the amortization schedule.
The number that matters here is the mortgage constant, which is annual debt service divided by the loan amount. It counts principal repayment as well as interest, which is why it is always higher than the interest rate. At 7.12% over a 25‑year amortization the constant is 8.573%. Shorten the amortization to 15 years at the same 7.12% and the constant jumps to about 10.4%. Same rate, same lender, twenty percent less loan. The second worked example below shows exactly what that does.
Debt yield is the test nobody explains
Debt yield is net operating income divided by the loan amount, expressed as a percentage. A $3,000,000 loan on a property producing $300,000 is a 10% debt yield. Lenders typically want 9% to 11%.
What makes it different is that it ignores the interest rate and the amortization completely. It is the lender asking a single question: if we foreclosed tomorrow and ran this property ourselves, what cash return would we earn on the money we lent? No rate, no schedule, no appraisal opinion. Just income over loan.
Debt yield exists because the other two tests can be gamed by a falling rate environment. Push rates low enough and debt service coverage will support almost any loan. Push cap rates low enough and loan‑to‑value will do the same. Debt yield does not move with either, which is precisely why it became the binding test during the cheap money years.
Which test binds, and why the answer changed
This is derivable, and it is worth knowing before you order an appraisal.
At a 7.12% rate over a 25‑year amortization, a 1.25x coverage requirement supports a loan of 9.33 times net operating income. A 10% debt yield floor supports 10.00 times. A 65% loan‑to‑value at a 7.00% cap rate supports 9.29 times. Three tests, three multiples, and the smallest one wins.
| Maximum leverage | Loan‑to‑value becomes the binding test above this cap rate |
|---|---|
| 60% | 6.43% |
| 65% | 6.97% |
| 70% | 7.50% |
| 75% | 8.04% |
Calculated at a 7.12% interest rate, 25‑year amortization, 1.25x coverage requirement. Below the listed cap rate, coverage binds instead.
Read that table backward and it tells you something useful. Most small‑balance commercial is trading above a 7.00% cap rate today, which means loan‑to‑value is the binding test for most owners right now, and the appraisal is the single most consequential document in the file. Below a 7.00% cap, coverage binds instead, and the amortization schedule becomes the lever worth negotiating.
Debt yield at a 10% floor does not bind today at all. It would only start to bind at a floor above roughly 10.7%. Which raises the obvious question of why it matters, and the answer is that it mattered enormously when the loan you are now refinancing was written.
Why 2021 borrowers got less than they expected. At a 3.75% rate over a 30‑year amortization, a 1.25x coverage test supported 14.40 times net operating income. A 70% loan‑to‑value at a 5.25% cap rate supported 13.33 times. But a 10% debt yield floor supported only 10.00 times, and it won. Borrowers who expected 70% leverage were quietly capped at closer to 52%. The test they had never heard of was the only one doing any work.
The rate you signed versus the rate you are quoted
The rate is not innocent in all this, but it is less guilty than owners assume. Here is what actually happened to the benchmark and to the spread over it.
| Origination date | 10‑year Treasury | Representative small‑balance loan rate | Spread over benchmark |
|---|---|---|---|
| September 2016 | 1.69% | 4.10% | 241 bps |
| September 2019 | 1.74% | 4.25% | 251 bps |
| September 2021 | 1.31% | 3.75% | 244 bps |
| September 2026 | 4.94% | 6.82% | 188 bps |
Treasury values are the 10‑year constant maturity from Federal Reserve data on or near September 20 of each year. Loan rates are representative quotes for small‑balance commercial at those dates, not a published index.
The benchmark moved 325 basis points between September 2019 and September 2026. The lender spread moved the other way, tightening by roughly 63 basis points. Competition among lenders for well‑leased property is not the problem. The entire increase is the risk‑free rate, and no amount of shopping fixes that.
This is why the advice to get more quotes, while never wrong, rarely closes a gap. Ten lenders pricing off the same Treasury curve with similar spreads will produce ten similar numbers. What varies between them is amortization, leverage tolerance, and whether they will look at the lease the way you do. Those are worth shopping. The rate mostly is not.
Rates also have not been standing still inside 2026. Published small‑balance quotes for net lease property ran near 6.18% in late June and near 6.82% by mid‑September, and the Federal Open Market Committee raised its target range on September 16 with projections pointing to at least one further increase. An appraisal ordered in the spring and a term sheet issued in the fall are not describing the same market.
Example one: the 2019 net lease loan where the lease term, not the rate, made the gap
An investor buys a single tenant net lease property in September 2019 for $4,400,000. Net operating income is $275,000, a 6.25% cap rate. The tenant is on a fifteen‑year lease with thirteen years remaining at purchase and a 7.5% rent bump at year five.
The bank writes 65% leverage, so $2,860,000, at 4.25% fixed for seven years on a 25‑year amortization schedule. At that rate and schedule the mortgage constant is 6.5009%, so annual debt service is $185,925 and coverage at closing is a comfortable 1.479x. Nobody on either side of that table is worried.
Seven years of payments later, in September 2026, the balance is $2,336,248. The rent bump landed at year five and net operating income is now $295,600. The tenant has never missed. By every measure an owner would use, this went well.
Then the lease is checked, and it has six years left.
That single fact reprices the entire loan, because no lender will amortize a loan meaningfully past the income that repays it. The property is being financed on the strength of one tenant, and when that tenant’s obligation ends in six years, the lender wants the balance far lower by then. So the quote comes back at 6.82%, which is a perfectly reasonable rate, on a 15‑year amortization rather than 25.
| Test | Calculation | Maximum loan |
|---|---|---|
| Loan‑to‑value at 65% | $295,600 ÷ 8.00% cap = $3,695,000 value, × 65% | $2,401,750 |
| Coverage at 1.25x | $295,600 ÷ 1.25 = $236,480 ÷ 10.6655% constant | $2,217,234 |
| Debt yield at 10% | $295,600 ÷ 0.10 | $2,956,000 |
Coverage binds. The lender funds $2,217,234 against a payoff of $2,336,248, and the owner brings $119,014 to closing.
Now run the same loan, the same rate, the same property, and the same tenant, with one change: a 25‑year amortization instead of 15. At 6.82% over 25 years the constant is 8.3441%, and the coverage test supports $2,834,113. That is not just enough to clear the payoff. It is $497,865 of cash‑out capacity.
The amortization schedule moved the loan by $616,878. The interest rate moved it by far less. And the amortization schedule was set by the lease term, which means the real cause of that check was a clock that started running the day the lease was signed.
The lesson that generalizes: on a net lease property, remaining lease term is a financing variable, not just a valuation variable. It compresses the amortization, which raises the constant, which shrinks the coverage test. Owners watch the cap rate and the credit rating. The number that quietly sets their refinance is the number of years left on the lease. Our investment grade credit tenant ratings reference covers the credit side of that equation.
Example two: the 2016 loan with three years of interest only
A different owner, a different structure, and a gap more than three times larger.
In September 2016 this owner buys a multi‑tenant commercial property for $6,200,000 producing $372,000 of net operating income, a 6.00% cap rate. The loan is $4,340,000 at 70% leverage, priced at 4.10% fixed for ten years on a 30‑year amortization, with the first three years interest only.
That interest‑only period looked free. During it, debt service was $177,940 a year instead of $251,650, coverage ran at 2.091x instead of 1.478x, and the owner pocketed roughly $73,710 a year in additional cash flow for three years. Around $221,000 total. It is easy to see why it was taken.
Ten years later the balance is $3,743,540. Over an entire decade the loan amortized by $596,460, which is 13.7% of the original principal. Had the loan amortized from day one, the balance would be $3,430,737. The interest‑only period left $312,803 of extra debt standing at maturity, against roughly $221,000 of extra cash flow received. That is the trade, and it is not a scandalous one, but it is a trade, and it was made a decade before the consequence arrived.
Net operating income has grown to $400,000. The property is genuinely performing better than it was at purchase. But cap rates for this asset type now sit near 7.75%, so the appraisal comes in at $5,161,290, roughly $1,038,710 below the 2016 purchase price. And the bank that wrote 70% in 2016 is writing 65% in 2026.
| Test | Calculation | Maximum loan |
|---|---|---|
| Loan‑to‑value at 65% | $400,000 ÷ 7.75% cap = $5,161,290 value, × 65% | $3,354,839 |
| Coverage at 1.25x | $400,000 ÷ 1.25 = $320,000 ÷ 8.5734% constant | $3,732,461 |
| Debt yield at 10% | $400,000 ÷ 0.10 | $4,000,000 |
This time loan‑to‑value binds, not coverage. The income comfortably supports a larger loan. The appraisal does not. The lender funds $3,354,839 against a payoff of $3,743,540, and the gap is $388,701.
Notice how differently the two examples behave. In the first, income was the constraint and a longer amortization would have solved everything. In the second, income is fine and no amortization schedule helps, because the ceiling is the appraised value. Two owners, two gaps, two completely different sets of options. This is the reason a general rule of thumb is close to useless here, and why running all three tests on your own numbers is the only thing that tells you which conversation you are actually in.
Why interest‑only loans produce the largest gaps
Amortization is the quiet force that saves most refinances. An owner who took a plain amortizing loan in 2016 has paid down a meaningful share of principal by 2026, and that paydown often absorbs the entire value decline without anyone noticing there was a problem.
Interest‑only removes that cushion. A full‑term interest‑only loan, common on securitized debt and on 2021 vintage paper, arrives at maturity owing exactly what it borrowed, in a market that has repriced underneath it. Partial interest‑only, like the three years above, removes part of the cushion. The 2021 cohort is the sharpest case, because those loans combined peak values, minimum rates, and the most aggressive interest‑only structures of the cycle.
Five ways to close a gap, ranked by what they cost you
Ordered roughly from cheapest to most expensive. Not all are available on every deal, and the binding test determines which ones can help at all.
1. Extend the amortization. Costs nothing in cash and can move the loan substantially, as the first example shows. Only works when coverage is the binding test, and only when the collateral supports the longer schedule. On a net lease property, the lease term caps this.
2. Negotiate an interest‑only period on the new loan. Reduces debt service, which raises the coverage test result. Cheap now, expensive later, since it recreates the same problem at the next maturity. Defensible if there is a defined exit inside the term.
3. Shorten the loan term to price lower on the curve. Sometimes a five‑year fixed prices below a ten‑year. Modest help, and it shortens the runway to the next decision.
4. Bring cash. The direct fix, and often the right one if the property is a long‑term hold with a good tenant and the gap is small relative to the equity. Worth thinking of as a new investment in the property at today’s terms, not as a fee, because that is what it is. The question is whether the return on that specific dollar is better here than elsewhere.
5. Mezzanine debt, preferred equity, or a seller carry. Expensive, typically low‑double‑digit cost, and it adds an intercreditor relationship on top of a property that already has a financing problem. It exists and it clears gaps, but it is the option that most often turns a manageable situation into a fragile one.
And the sixth path, which is not on the list because it is not a way to close a gap but a way to avoid it: sell. If the required check is large, the property is not a long‑term hold, and the equity has a better use, writing a large check to retain an asset you intended to exit within a few years is a decision worth examining rather than defaulting into. Sellers who move before the maturity date control the process. Sellers who move after it usually do not. For owners planning to redeploy rather than cash out, the 1031 exchange route carries its own timing requirements that need to start well before a closing.
If you own a net lease property, start with the lease
Everything above applies to commercial real estate generally. Net lease property has one additional constraint that dominates all of it.
The loan is underwritten to the lease. Not to the building, not to the market, and not really to you. That means three things follow directly from the number of years remaining:
- Amortization is capped near the lease term. Ten years remaining supports a materially longer schedule than six, at the same rate, on the same property.
- Loan term is capped inside the lease term. Most lenders will not let a balloon land after the tenant’s obligation ends.
- The cap rate expands as the lease shortens. Which drags down the appraisal, which tightens the loan‑to‑value test at the same time the coverage test is tightening.
All three move against the owner simultaneously, which is why net lease refinance gaps tend to appear suddenly rather than gradually. A property that financed easily with nine years of lease remaining can be difficult at six. Tenant credit quality softens this but does not remove it. A property leased to an investment grade tenant will draw better pricing and more lender interest at six years remaining than an unrated tenant will, and this is one of several reasons the credit rating matters well beyond the cap rate. You can read more in our investment grade guide and across our NNN properties coverage.
Find your gap before the appraisal does
Three tests set your loan amount and the lender funds the lowest one. You can know which test binds on your property today instead of finding out in six months.
- Refinance. What a lender will fund today, which of the three underwriting tests binds, and what the payment does to your cash flow.
- Contribute equity. The cash required to close the gap, and what return that specific dollar earns by staying in this property.
- Sell. What the property would bring today, what your prepayment terms cost, and whether the timing still favors you.
- Sale leaseback. Added when your own business occupies the building, because then the tenant and the borrower are the same person.
Nothing to learn and nothing for you to model. Answer three questions, send the loan documents, the lease, and the last twelve months of operating numbers, and a person reads them.
Confidential. If a sale turns out to be the right path, any listing or co brokerage runs through the appropriate broker of record. We can introduce you to lenders on the debt side. This review is informational and is not lending, legal, tax, or investment advice.
Related Investment Grade research
- Should I refinance or sell my commercial property before the loan matures?
- Investment grade: the category, the ratings, and the assets
- The investment grade guide
- Investment grade credit tenant ratings
- NNN properties
- 1031 exchange for investment grade property
Frequently asked questions
Why will my bank lend me less than I currently owe?
Because the loan amount is set by three tests run against today’s numbers, not by your existing balance. Loan‑to‑value uses a current appraisal, which is lower than your original appraisal if cap rates expanded. Debt service coverage uses today’s interest rate and the amortization schedule the lender is willing to offer. Debt yield divides net operating income by the loan. The lender funds the smallest of the three results. If that number is below your payoff, the difference is due at closing.
What is a cash‑in refinance?
A refinance where the borrower brings money to the closing table rather than receiving proceeds. It happens when the new loan sized by the lender’s tests is smaller than the balance being retired. The cash covers the difference plus closing costs. It is the industry term for the gap, and it is becoming more common on 2026 and 2027 maturities.
What is debt yield and why does my lender use it?
Debt yield is net operating income divided by the loan amount. A $3,000,000 loan on a property producing $300,000 is a 10% debt yield. Lenders generally require 9% to 11%. It exists because loan‑to‑value and debt service coverage both loosen when rates and cap rates fall, which can allow leverage that looks safe on paper but is not. Debt yield ignores the rate and the amortization entirely and asks only what cash return the lender would earn if it took the property back.
Which of the three tests usually limits the loan?
It depends on the cap rate. At a 7.12% interest rate over a 25‑year amortization with a 1.25x coverage requirement, loan‑to‑value at 65% becomes the binding test on properties valued above roughly a 6.97% cap rate, and coverage binds below it. Since most small‑balance commercial currently trades above a 7.00% cap, the appraisal is typically the constraint. A 10% debt yield floor does not bind at today’s rates, though it was frequently the binding test on loans written in 2020 and 2021.
Does a longer amortization actually help?
Substantially, when debt service coverage is the binding test. Stretching from a 15‑year to a 25‑year amortization at a 6.82% rate lowers the mortgage constant from 10.67% to 8.34%, which in the first example above raises the supported loan from $2,217,234 to $2,834,113, a difference of $616,878 on the same property at the same rate. It does nothing when loan‑to‑value is the binding test, because that ceiling is set by the appraisal.
Why does my remaining lease term affect my loan amount?
On a single tenant net lease property the tenant’s rent is the only source of repayment, so lenders will not amortize a loan meaningfully past the lease expiration and generally will not let a balloon payment land after it either. A shorter remaining lease forces a shorter amortization, which raises the mortgage constant and lowers the loan the coverage test will support. Shorter leases also push cap rates wider, which lowers the appraisal and tightens loan‑to‑value at the same time. Both constraints move against the owner together.
Did taking an interest‑only period cause my gap?
It contributed. Interest‑only removes the principal paydown that would otherwise offset a value decline over the loan term. In the second example above, three years of interest‑only on a ten‑year loan left $312,803 more debt outstanding at maturity than a fully amortizing schedule would have, against roughly $221,000 of additional cash flow received during the interest‑only period. Full‑term interest‑only loans, common on securitized debt and on 2021 vintage paper, arrive at maturity owing the entire original balance.
Will shopping more lenders close the gap?
Usually not by much. Between September 2019 and September 2026 the 10‑year Treasury rose roughly 325 basis points while lender spreads over the benchmark tightened by roughly 63 basis points. Lenders are competing hard on well‑leased property. What does vary meaningfully between lenders is the amortization schedule offered, the maximum leverage, and how a given lender underwrites the lease and the tenant. Those are worth shopping. The rate itself mostly is not.
Is bringing cash to a refinance ever the right decision?
Frequently, when the property is a long‑term hold with a strong tenant and the required amount is modest relative to the equity. The useful way to frame it is as a new investment in the property at today’s terms rather than as a penalty, then to ask what return that specific dollar earns here compared with its alternatives. The answer changes materially depending on how long you intend to hold and what you would otherwise do with the money.
Sources and methodology
Treasury observations are the 10‑year constant maturity rate published by the Federal Reserve, with the September 17, 2026 value of 4.94% taken from the H.15 Selected Interest Rates release dated September 18, 2026, and prior‑year values from the Federal Reserve Bank of St. Louis FRED series. The September 16, 2026 policy decision and the federal funds projections are from the FOMC statement and Summary of Economic Projections issued that day. Current commercial mortgage rate benchmarks by property type are from published lender rate sheets dated June 21, 2026 and September 16, 2026. Representative historical loan rates shown in the rate table are typical small‑balance commercial quotes at those dates, presented as illustrations rather than a published index. Coverage, leverage, and debt yield requirements reflect common underwriting parameters and vary by lender, property type, and borrower. All worked examples are simplified illustrations constructed for this page. They are not loan quotes, appraisals, or valuations, and they do not constitute lending, legal, tax, or investment advice.
