What is a debt service coverage ratio (DSCR) in real estate?
The Debt Service Coverage Ratio (DSCR) measures a property's ability to generate sufficient income to cover its debt obligations, calculated by dividing net operating income by annual debt service, and used by lenders to assess repayment risk.
How DSCR Is Calculated
- DSCR equals net operating income divided by total annual debt service
- A DSCR above 1.0 indicates income exceeds debt obligations
- Lenders typically require minimum DSCR of 1.25 to 1.50 for commercial loans
What DSCR Reveals
- Margin of safety between property income and loan repayment burden
- Sensitivity of the loan to occupancy or rental income declines
- Comparative risk profile across different properties in a portfolio
Implications for Borrowers
- Insufficient DSCR may prevent loan approval or require additional security
- Maintaining DSCR above covenanted levels is typically a loan condition
- DSCR breaches can trigger lender review or acceleration of repayment
DSCR is arguably the most important underwriting metric in commercial real estate lending, providing lenders with a clear measure of how comfortably a property's income covers its debt service under both current and stressed conditions.
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