Commercial Real Estate Dictionary

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Debt service

Definitions of Debt service
  • Debt service is the monetary amount of the periodic payment made to reimburse the principal and interest on a loan. Annual Debt Service (ADS) is the sum of the payments made to pay back a loan over the period of one year.
    The monthly payment on the mortgage is $10,000 per month. The annual debt service is therefore $120,000 per year.


What is Debt Service?

Have enough cash flow to service the debt on a loan? The debt service is simply the cash required to make the payments on a loan. Debt service is the amount of money needed to service a mortgage, bond issue, or other type of loan. The payments consist of both principal and interest.

Why Is Debt Service Important?

Debt service is important for a borrower, because a borrower needs to know how much cash to come up with to make loan payments on a debt. A real estate investor needs to know the debt service amount because the real estate investor needs to know if the net income on an investment property will be enough to cover the loan payments once all the expenses and taxes are paid. A lender needs to know the debt service amount to determine if the borrower has enough income and cash flow to cover the loan payments.

How Is Debt Service Calculated?

Debt service is determined by calculating the periodic payments due on a loan. A simple example of calculating the debt service on a loan is the same as calculating the monthly payments of a fully amortized loan on a financial calculator.

Since the purpose of calculating debt service is to compare cash flow required to pay a loan back against cash available, it is useful to calculate total debt service for one year. Debt service can then be compared against annual income.

The total of all loan payments for both principal and interest over one year is known as the Annual Debt Service (ADS). Annual Debt Service is contrasted against annual Net Operating Income (NOI) to see if there is enough income to cover the loan payments.

What Is The Debt Service Coverage Ratio?

Lenders want to know if there is enough income to pay the payments on the debts they issue. The measure lenders use to quantify the ratio of income available to the cash necessary to reimburse the debt is the Debt Service Coverage Ratio (DSCR).

If the DSCR is greater than 1.0, then available income is more than the amount needed to make the payments on the debt. Lenders will want to see a certain level of cushion between available income to provide a margin of security and manage their risk. If a lender wants to see a 20% buffer in income over the loan payments, the DSCR would be 1.2.


        

Real Estate Terms

1. How much cash will be required to make your mortgage payments? Debt Service >>


2. Who can you go to to finance your construction or development project? Construction Lender >>


3. What professional can assist you in maximizing the value of your investment property? Asset Manager >>


4. How can we assess future commitment to infrastructure to support our communities and future development? Capital Improvements Projects >>


5. What measurement indicates if a property's financial performance can cover its debt? DSCR >>


6. What part of a city is the center of urban economic development? CBD >>


7. What allows property owners and professionals to estimate the market value of a commercial property? Comparable Property >>


8. What can landords do to entice prospective tenants? Concession >>


9. What critical factor do stores depend on to drive traffic? Anchor Tenant >>


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