In one sentence
A loan covenant requiring the property to maintain a minimum debt service coverage ratio, tested periodically.
The longer version
A DSCR covenant sets a floor: the property must keep producing at least, say, 1.20x coverage, tested quarterly or annually from operating results. Falling below can trigger cash sweeps, reserves, or default.
The covenant is only as reliable as the reporting behind it, which is why financial reporting requirements and DSCR covenants are tested together.
Common questions
- How is a DSCR covenant tested?
- From the borrower's reported operating statements, usually quarterly on a trailing basis, using the NOI and debt service definitions in the loan agreement rather than the borrower's own figures.
- What happens if a DSCR covenant is breached?
- Depending on the loan, a cash management period, a cash sweep, a required paydown or reserve, or an event of default, often after a cure period.
- Can a borrower cure a DSCR covenant breach?
- Many loans allow a cure by depositing cash or paying down principal to bring the ratio back to the required level, or by the ratio recovering over subsequent tests.
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