Debt Service, Not Cap Rate, Is Setting the Market

Cap rate is still the number most sponsors lead with. It's rarely the number that actually determines whether a deal gets financed right now.

At current rates, debt service coverage is the binding constraint on most transactions we look at — not valuation, not exit cap assumptions, not even leverage in isolation. A deal can pencil at a reasonable cap rate and still fail underwriting the moment you run trailing cash flow against a real amortization schedule at today's cost of debt.

This matters because it changes what a sponsor should lead with when approaching capital. A pitch built around comps and cap rate compression tells us what you think the asset is worth. It doesn't tell us whether the asset can service the debt you're asking for. The deals that move fastest through underwriting are the ones where the sponsor has already run that math themselves — current NOI, actual debt constant, coverage under a stressed rate scenario — before it ever reaches us.

The practical implication: if your deal only works on a cap-rate story, it's worth stress-testing debt service before you go to market, not after a lender says no.