## What is Loan Sizing?
**Loan Sizing** is the underwriting process by which commercial real estate lenders estimate the appropriate amount of financing to offer to a particular borrower.

## How Does Loan Sizing Work in Real Estate?
In the commercial real estate (CRE) industry, the reliance on debt financing to fund projects is an inherent attribute of the strategies used by investment firms to achieve their target returns.

The [cost of debt](/content/knowledge/cost-of-debt/index.html), or interest rate [pricing](/content/knowledge/pricing-power/index.html), is one of the core drivers of market demand from buyers, which has broad implications on property valuations.

- Positive Leverage (Project Return > Cost of Debt) → Higher Return on Equity (ROE)  
- Negative Leverage (Project Return < Cost of Debt) → Lower Return on Equity (ROE)

## How to "Right-Size" a Commercial Loan
The [underwriting](/content/knowledge/raising-capital-and-security-underwriting/index.html) process differs per lender and is affected by various factors, such as the real estate project type, the track record of the borrower requesting the loan, and current market conditions.

## Commercial Lending Loan Sizing Metrics
The three fundamental credit metrics that form the basis of loan sizing in the commercial real estate (CRE) industry are as follows:
1. Loan to Value ( [LTV](/content/knowledge/lifetime-value-ltv/index.html))
2. Debt Service [Coverage Ratio](/content/knowledge/interest-coverage-ratio/index.html) (DSCR)
3. [Debt Yield](/content/knowledge/debt-yield/index.html) (DY)

## How to Perform Loan Sizing in Real Estate  
### 1. Calculate Loan to Value (LTV)  
**Loan to Value Ratio (LTV) =** Loan Amount **÷** Property Value

### 2. Calculate Debt Service Coverage Ratio (DSCR)  
**Debt Service Coverage Ratio (DSCR) =** Net Operating Income (NOI) **÷** Annual Debt Service

### 3. Calculate Debt Yield (DY)  
**Debt Yield (DY) =** Net Operating Income (NOI) **÷** Total Loan Size

## Maximum Loan Amount Formula
**Maximum Loan Amount =** Max. Loan-to-Value (LTV) **×** Property Value

**Maximum Loan Amount =** Property Value **÷** Minimum DSCR

**Maximum Loan Amount =** Net Operating Income (NOI) **÷** Minimum Debt Yield

## Real Estate Loan Sizing Calculation Example
Suppose we’re tasked with performing loan sizing on a financing proposal received from a commercial real estate (CRE) investor. The underwritten NOI, or lender-adjusted NOI, is $2 million, while the cap rate is 8.0%. Therefore, the implied property value comes out to $25 million.

- Property Value = $2 million ÷ 8.0% = $25 million
- Target Commercial Loan = $16 million
- Amortization Period = 25 Years
- Interest Rate (%) = 6.5%

The lender’s constraints are 70%, 8%, and 1.25x for LTV, DY, and DSCR respectively.

- Loan-to-Value Ratio (LTV) = 64.0%
- Debt Yield = 12.5%
- Debt Service Coverage Ratio (DSCR) = 1.52x

Therefore, the maximum loan that the lender can offer is $17.5 million.