What is an interest coverage ratio (ICR) in real estate loans?

The Interest Coverage Ratio (ICR) measures how many times a property's net income covers its interest expense, used by lenders as a covenant and risk metric to ensure borrowers can comfortably service interest obligations from property cash flows.

How ICR Differs from DSCR

• ICR covers interest payments only, not principal repayments
• DSCR covers total debt service including both interest and principal
• ICR is commonly used for interest-only loan structures

Typical ICR Requirements

• Lenders typically require ICR of 1.5 to 2.0 times for commercial loans
• Higher ICR thresholds may be required for riskier property types
• Covenant testing typically occurs quarterly or annually

Implications of ICR Breach

• Breach triggers lender notification and potential remediation requirements
• May result in cash trap provisions restricting distributions
• Persistent breach can lead to loan acceleration or enforcement action

ICR is a critical financial health indicator in real estate lending, providing lenders with ongoing visibility into a borrower's ability to service interest costs as income and market conditions change throughout the loan term.