In one sentence
Net operating income divided by debt service, the standard measure of whether a property's cash flow covers its loan payments.
The longer version
A DSCR of 1.25x means the property produces a quarter more income than the loan requires. Lenders size loans to minimum DSCRs, underwrite them on stressed assumptions, and often carry them forward as ongoing covenants tested from the borrower's financial reporting.
The ratio is only as honest as its inputs. Underwritten NOI definitions, actual versus pro forma, and the treatment of reserves and management fees all move the number, which is why loan agreements define the calculation precisely.
Common questions
- How do you calculate DSCR?
- Divide net operating income by annual debt service. A property with $1,250,000 of NOI and $1,000,000 of debt service has a DSCR of 1.25x, meaning income covers payments with a 25 percent cushion.
- What is a good DSCR for a commercial loan?
- It depends on the lender and property type. Many lenders look for a minimum somewhere around 1.20x to 1.35x for stabilized property, with higher floors for riskier assets.
- What is a DSCR covenant?
- A loan covenant requiring the property to maintain a minimum DSCR, tested periodically from reported financials. Breaching it can trigger cash management or a default.
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