Commercial Real Estate DSCR Calculator
Your Debt Service Coverage Ratio:
Understanding the Debt Service Coverage Ratio (DSCR)
In commercial real estate (CRE) and business lending, the Debt Service Coverage Ratio (DSCR) is a critical metric used by lenders to determine if a property or business generates enough income to cover its debt obligations. Essentially, it measures the "safety margin" for a loan.
How to Calculate DSCR
The formula for DSCR is straightforward but requires accurate financial data:
- Net Operating Income (NOI): This is your gross rental income minus all necessary operating expenses (property taxes, insurance, maintenance, utilities). It excludes mortgage payments and depreciation.
- Annual Debt Service: The total amount of principal and interest payments made on all loans for the property or business within one year.
What is a Good DSCR?
Lenders have different risk appetites, but general benchmarks in the commercial lending industry include:
| DSCR Value | Meaning |
|---|---|
| Below 1.0 | Negative Cash Flow (Property does not cover its debt). |
| 1.0 to 1.15 | Tight Cash Flow (Higher risk for lenders). |
| 1.20 to 1.35 | Standard Industry Benchmark (Typical requirement for CRE loans). |
| Above 1.50 | Strong Cash Flow (Preferred by lenders, may qualify for lower rates). |
A Realistic DSCR Example
Imagine you are looking at a multi-family apartment building with the following financials:
- Gross Income: $250,000
- Operating Expenses: $100,000
- Monthly Mortgage Payment: $10,000
First, calculate the NOI: $250,000 – $100,000 = $150,000.
Next, calculate the Annual Debt Service: $10,000 * 12 = $120,000.
Finally, divide NOI by Debt Service: $150,000 / $120,000 = 1.25 DSCR. This meets the standard requirement for most commercial banks.