Debt service coverage ratio (DSCR) is the ratio of a property’s net operating income (NOI) to its total annual debt service (principal plus interest payments). A property generating $1.5 million in NOI with $1.2 million in annual debt service has a DSCR of 1.25x, meaning it produces 25% more income than needed to cover its loan payments. DSCR is the most widely used metric in CRE lending for assessing a property’s ability to service its debt. Lenders typically require a minimum DSCR of 1.20x to 1.30x at origination and impose ongoing DSCR covenant tests throughout the loan term. A DSCR below 1.00x means the property’s income does not cover its debt payments — a situation that signals potential distress.
How It Works in Practice
DSCR is deceptively simple as a formula but complex in application. The result depends entirely on how you define the two inputs. For NOI, lenders may use trailing three-month (T-3), trailing six-month (T-6), or trailing twelve-month (T-12) periods, and each can produce materially different coverage ratios for the same property. For debt service, floating-rate loans introduce variability — your DSCR changes every time SOFR moves, which is why lenders on floating-rate deals often test DSCR using a stressed rate or require an interest rate cap. DSCR covenants also interact with other loan provisions: a failed DSCR test might trigger a cash sweep, a lock-box, or a restriction on distributions to equity. Knowing your DSCR across every loan in your portfolio — and forecasting where it’s headed — is essential to avoiding surprises.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.