Commercial Real Estate Dictionary

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Debt (service) coverage ratio

Definitions of Debt (service) coverage ratio
  • The debt coverage ratio (DCR) is the ratio of annual net operating income (NOI) to the annual debt service (ADS). DCR = NOI / ADS


What is Debt Service Coverage Ratio?

The debt service coverage ratio (DSCR) is the ratio of net operating income (NOI) divided by the total debt service amount for the same period of time. The annual debt service (ADS) is the sum of all loan payments made over the period of one year.

DSCR = Annual NOI / ADS

The debt service coverage ratio is important because it indicates whether there is enough income to make the payments on a loan. If the ratio is greater than 1.0, then there is enough income to make the loan payments

To illustrate, if a rental property's annual NOI is $60,000 and the total annual loan payments are $30,000 ($2500 per month x 12 months), then the DSCR is 2.0. This means there is more net income coming in than needed to make the loan payments.


DSCR = $60,000 / $30,000 = 2.0

In practice, banks and other financial institutional establish their own criteria for what they want the minimum DSCR to be. The may specify a minimum DSCR value of 1.2 or greater




        

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