DSCR (Debt Service Coverage Ratio)
Definition
The ratio of net operating income (NOI) to debt service payments, measuring a commercial property's ability to cover its mortgage obligations. DSCR = Annual NOI ÷ Annual Debt Service. A DSCR of 1.25x means the property generates 25% more cash flow than required for debt payments, providing cushion for vacancies or expense increases.
Why it matters
DSCR is the primary underwriting metric in commercial real estate lending and CMBS. Lenders typically require minimum DSCR of 1.20x-1.30x for stabilized properties. DSCR below 1.0x means property cannot cover debt from operations—cash flow deficit must be funded by owner or reserves. In CMBS, declining DSCR often triggers loan modifications, additional reserves, or transfer to special servicer. Understanding DSCR dynamics explains CMBS performance during COVID—office buildings saw NOI collapse while debt service stayed fixed, pushing DSCR below 1.0x and forcing forbearance negotiations.
Technical details
DSCR calculation methodology
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service. NOI = Gross Rental Income - Operating Expenses (excluding debt service and depreciation). Debt Service = Principal + Interest payments. Example: Office building generates $2M gross rents, $800K operating expenses, $1M debt service. NOI = $2M - $800K = $1.2M. DSCR = $1.2M / $1M = 1.20x. Property covers debt service by 20%. If NOI falls to $900K (tenant vacancies), DSCR drops to 0.90x—property no longer covers debt from cash flow.
DSCR requirements by property type
Lenders require different minimum DSCR based on property type and risk. Multifamily (stabilized): 1.20x-1.25x minimum. Office (stabilized): 1.25x-1.30x. Retail: 1.30x-1.35x (higher due to retail stress). Industrial/Logistics: 1.25x-1.30x. Hotels: 1.40x-1.50x (higher volatility). Development/Construction: 1.50x+ (much higher risk). These are minimums at origination. During life of loan, DSCR may drift up or down. Loan covenants often require maintaining minimum DSCR (1.15x-1.20x) or face cash trap or special servicing.
DSCR vs LTV: different risk metrics
DSCR measures cash flow coverage, LTV measures equity cushion. A property can have strong LTV but weak DSCR (low leverage but high expenses or vacancy). Or weak LTV but strong DSCR (high leverage but strong cash flow). Example: Property worth $100M with $60M loan (60% LTV) generating $5M NOI with $6M debt service = 0.83x DSCR. Low LTV suggests safety, but DSCR <1.0x means cash flow insufficient for debt—requires capital infusion. Lenders care about both: LTV for default severity (how much recovered in foreclosure), DSCR for default probability (can borrower pay).