The loan constant, sometimes called the mortgage constant, is the ratio of a loan's total annual debt service, meaning both principal and interest payments, to the original loan principal, expressed as a percentage. Unlike an interest rate alone, the loan constant captures the full annual cost of carrying a loan, including any principal amortization built into the payment schedule.
Investors and sponsors often use the loan constant to quickly assess whether a property's income can comfortably cover its debt obligations, comparing it against the property's capitalization rate. When a property's cap rate exceeds its loan constant, the spread generally indicates positive leverage, meaning borrowed money is enhancing overall returns. When the loan constant exceeds the cap rate, leverage typically works against the investment, reducing returns relative to an unlevered purchase. Because it accounts for amortization, the loan constant is generally a more complete measure of debt cost than the interest rate alone.
Further reading: Lightstone's Track Record
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