The debt service coverage ratio (DSCR) is a metric used in real estate financing to measure a property’s ability to generate enough income to cover its debt service payments. It is calculated by dividing the property’s net operating income (NOI) by its total debt service expense.

Formula:

DSCR = NOI / Total Debt Service Expense

Components:

• NOI: Net operating income, which is the property’s income after subtracting depreciation, amortization, and interest expense.
• Total Debt Service Expense: The total amount of debt service payments due on the property, including mortgage principal and interest, mortgage insurance, and other debt expenses.

Interpretation:

• A DSCR of 1.0 or above indicates that the property can comfortably cover its debt service payments.
• A DSCR below 1.0 indicates that the property may have difficulty covering its debt service payments.
• A low DSCR can make it more difficult to obtain financing or may result in higher interest rates.

Uses:

• Loan underwriting: Lenders use DSCR to assess the creditworthiness of a property borrower.
• Property valuation: Investors use DSCR to determine the value of a property.
• Loan modification: Borrowers may use DSCR to negotiate loan modifications.

Factors Affecting DSCR:

• Property type (e.g., residential, commercial)
• Location
• Market conditions
• Property condition
• Operating expenses
• Length of lease agreements
• Interest rates

Additional Notes:

• DSCR is a ratio, so the units are the same as the units of the components (e.g., percentage, dollar amount).
• DSCR is a common metric used in commercial real estate financing, but can also be used in other types of financing.
• The DSCR is an important metric for real estate investors and borrowers to understand.