Debt Yield, DSCR, and Reality: How Smart Investors Underwrite Risk with Culby Culbertson

Debt Yield, DSCR, and Reality: How Smart Investors Underwrite Risk with Culby Culbertson

On Accredited Investors Only, host Peter Neill sits down with Culby Culbertson, a Dallas-based capital markets professional, to peel back the curtain on how lenders actually think and how serious investors should underwrite commercial real estate risk. Culby walks through his journey from oil and gas to fix-and-flips to structuring hundreds of millions in loans—and shares practical rules that separate realistic underwriting from wishful pro formas.

From flips to capital markets: why the debt side matters

Culby’s path is familiar: start small, learn hands-on construction and operations, meet increasingly experienced players, then move up to multifamily and the capital side. That progression matters because understanding the daily realities of operations and construction makes you a better underwriter—and a better borrower or partner. Debt isn’t just leverage; it determines whether a deal can actually be executed.

What capital markets really means

Capital markets in commercial real estate is shorthand for the market of lenders and investors that will fund a deal: banks, agencies, debt funds, private capital, and institutional players. The job of a capital markets professional is to vet deals, build underwriting packages, and match an asset to the right capital source and structure.

Key pieces of every underwriting package

  • T12 (trailing 12 months) financials and rent rolls
  • NOI (net operating income) and expense detail
  • Pro forma and business plan for stabilization or value-add
  • CapEx budget, management assumptions, and market comps

Three underwriting pillars you must master

There are three ratios that quickly reveal whether a deal is credible to experienced capital providers.

Debt Service Coverage Ratio (DSCR)

DSCR = NOI ÷ Annual Debt Service. It measures how comfortably a property covers debt after expenses. In current markets, underwriters often look for a DSCR nearer to 1.25–1.35. A DSCR of 1.0 is cash neutral; anything meaningfully below that signals distress and requires a compelling story.

Debt Yield

Debt yield is how lenders measure return relative to the loan amount: NOI ÷ Loan Amount. It reflects lender risk appetite and is typically in the range of 8–12% for many commercial assets. Lower-risk, long-term net-lease deals can have lower yields; shorter-term or higher-risk assets (hotels, construction) demand higher debt yield.

Yield on Cost

Yield on cost measures the return on total project cost (purchase plus the capital invested). For value-add and construction projects, experienced lenders and investors often expect yield on cost to be at least around 7.5–8%. If the yield on cost is below that, you need a very strong narrative or exceptional market tailwinds.

“If the math doesn’t work, the story doesn’t matter.”

How to verify a pro forma (without getting fooled)

Pro formas are easy to manipulate; realistic assumptions are not. Use both data tools and people on the ground to validate numbers:

  • Use CoStar, Yardi, and public data for a back-of-the-envelope reality check.
  • Call local investment sales brokers, appraisers, and operators for current rent and expense intel.
  • Ask for comparable sales and leasing comps from people who actually transact in the submarket.
  • Stress-test the model: run different interest-rate scenarios, expense creep, and slower stabilization timelines.

Red flags underwriters call out

  • Unrealistic rent growth or occupancy assumptions disconnected from local comps.
  • Expense ratios that are unusually low or missing recurring costs.
  • Yield on cost that leaves little cushion for cost overruns or rate increases.
  • Operator track record that doesn’t match the risk profile of the business plan.

Matching your deal to the right capital

Not every lender is right for every deal. The most successful capital market structuring comes from knowing who lends what, under which conditions:

  • Community and regional banks for relationship-oriented, often local deals
  • Agency lenders for stabilized, higher-quality multifamily or long-term transactions
  • Debt funds and private lenders for bridge, construction, or less conforming credits
  • Institutional capital for large, scalable, or highly underwritten assets

A well-prepared package speeds placement. If the first lender passes, they often point you to a better fit—so present clean underwriting from the start.

What moves underwriting every day

Rates and macro variables change underwriting faster than most operators realize. Two critical drivers:

Treasury rates

Treasuries set the baseline for spreads. A 25–50 basis point move in the five-year or ten-year Treasury can change your debt service calculation materially over a 45–60 day loan process. Always model multiple rate scenarios.

Construction and commodity costs

Rising lumber, steel, fuel, truck, and labor costs push construction budgets higher and prolong timelines. Cost escalation can easily erase thin returns—especially on projects with a tight yield on cost.

Market view and practical posture

Culby is cautiously optimistic: markets tend to move in cycles, and current treasury levels are not necessarily historically low. Investors waiting for a dramatic rate reversal may be waiting a long time. Practical posture is key—underwrite conservatively, model stress cases, and know your exit and contingency plans.

Why operating businesses matter

Diversifying into operating companies can complement real estate holdings. Banks view operating businesses favorably because they offer:

  • Cashflow flexibility—you can adjust operations to manage revenue and costs
  • More control over outcomes compared with passive net-lease positions
  • Potentially stronger banking relationships and different financing options (SBA, asset-backed loans)

Examples include service businesses that deliver essential demand (HVAC, logistics), where revenue can be managed more actively than passive rent rolls.

Practical checklist for accredited investors evaluating LP opportunities

  1. Get a second set of underwriting eyes—work with a capital markets or underwriting pro.
  2. Request T12s, rent roll, and detailed expense backup; stress-test the pro forma.
  3. Verify market assumptions with local brokers, appraisers, and recent sales data.
  4. Model interest-rate sensitivity and likely refinancing scenarios.
  5. Confirm the sponsor’s track record and alignment of incentives.

Five quick takeaways

  • Math first: solid numbers beat a good story every time.
  • Know DSCR and debt yield: lenders use these to make decisions, not narratives.
  • Validate pro formas: combine software with conversations with local brokers and appraisers.
  • Watch treasuries and construction costs: they change underwriting in real time.
  • Consider operational businesses: they provide flexibility banks like and cashflow resilience.

For investors who want to sharpen their underwriting or get a second opinion, focus on the three pillars—DSCR, debt yield, and yield on cost—validate assumptions with market participants, and always run stressed rate scenarios. That discipline separates deals that pencil from ones that merely tell a good story.

Where to learn more

Culby Culbertson and his firm maintain a public presence for professionals who want to connect and dig deeper into capital markets execution and underwriting practices. Search for Culbertson Holdings or Culby Culbertson on professional networks to reach out for a conversation.