Finance
What Is DSCR in Commercial Real Estate?
Debt service coverage ratio compares a property’s NOI with the annual loan payment. It is a coverage test, not a promise that a lender will say yes.
Quick answer
DSCR equals annual NOI divided by annual debt service. NOI of $120,000 and debt service of $96,000 produce a DSCR of 1.25. Below 1.00 means the NOI in the formula does not cover that payment.
Key takeaways
- DSCR = NOI ÷ annual debt service.
- 1.00 is the line where NOI equals the payment you entered.
- Lenders set their own minimums.
- A passing ratio does not approve a loan or replace a guarantee discussion.
The formula
Annual NOI ÷ annual debt service
| Input | Amount |
|---|---|
| Annual NOI | $120,000 |
| Annual debt service | $96,000 |
| DSCR | 1.25 |
Debt service is the year’s principal and interest, not the interest alone, unless you clearly say you are using interest only. The DSCR calculator divides the two numbers you type. If debt service is zero, it stops, because the ratio would be meaningless.
How to read the number
At 1.00, NOI equals the payment in the formula. There is no cushion for a vacancy, a tax increase, or a repair. Above 1.00, there is some room. How much room a lender wants is that lender’s credit policy.
Below 1.00 means the income in your NOI does not cover that debt. Sometimes the business’s cash flow, extra collateral, or a larger down payment changes the loan. Sometimes it does not. Those are lender conversations. Owner-users should read the owner-user page before assuming the property’s rent is the only income a lender will consider.
The ratio is only as good as the NOI
A flattering DSCR often starts with a flattering NOI. If vacancy was set to zero and management was left out, the coverage is theater. Rebuild NOI, then divide.
Amortization and a balloon change the payment. A 25-year schedule and a 10-year balloon are not the same risk even when this year’s DSCR matches. The ratio is a one-year snapshot. Cash-on-cash return looks at the equity. Use both.
Local property, not a local constant
Nothing about Omaha or Lincoln changes the division. Local taxes and insurance change NOI, which changes DSCR. A payment that works on an Omaha industrial lease may fail on a Lincoln building with a shorter tenant. Run the property in front of you. The buy page lists financing questions without quoting a product.
Questions people ask
Is 1.25 a required DSCR?
No. It is a common example because the cushion is easy to see. A lender, a loan program, or a property type may use a different figure. The number on the term sheet is the one that counts.
Does DSCR include my personal income?
The formula on this page uses property NOI. Some owner-user loans look at the business as well. That is a different analysis, and the lender defines it.
What if the loan is interest-only?
Use the interest-only payment as debt service and label it. The principal you will owe later is still a risk the ratio does not show.
Written by Bryan Robinson, a Professional Sales Agent with NHS Commercial, licensed in nebraska.
Want help evaluating a commercial property?
Call or text Bryan at 402-521-3000 to talk through a specific property.
Bryan Robinson
NHS Commercial
Professional Sales Agent | Licensed in Nebraska