What is DSCR?

A broker new to the industry recently asked me what this term meant. I realized others might be confused about this term as well.

DSCR stands for Debt Service Coverage Ratio. The quick and dirty explanation is it is a numberthat tells how easily a borrower will be able to make his or her loan payments. How can a number tell this? By creating a ratio of net operating income(NOI) to loan payments. Here’s an example:

Let’s say Lucy owns a building. After collecting all the rent and paying all of her expenses for the year, whatever cash she has left over is called Net Opertating Income (See below)

RENTS     $500,000
Expenses $100,000
NOI          $400,000

Lucy has a loan payment of $275,000 per year. To get the DSCR, take the NOI divided by the loan payment.

$400,000 / $275,000 = 1.45

In this example Lucy has a DSCR of 1.45, which means she could pay her loan payment and still have lots of cash left over. Any lender would like a DSCR this high.

The higher the DSCR, the better. If the DSCR was 1.0 there would be just enough cash to pay the loan,making the lender very nervous. If the DSCR was 2.0 there would be twice enough cash to make the payment. Each lender has a different comfort level how high or low the DSCR is. Depending on the property type a DSCR of 1.25 is typically the minimum. That said, I’ve seen them as low as 1.15 for special cases (though not recently) or even 1.01 for credit tenants (like a Walgreens, Microsoft, etc.) The DSCR is just one way a lender will use to examine a loan.