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What is Debt Service Coverage Ratio (DSCR)?

The ratio of net operating income to total annual debt service payments, measuring a property's ability to cover its loan obligations.

Definition

Debt Service Coverage Ratio (DSCR) measures a property's ability to generate enough income to cover its debt payments. A DSCR of 1.25x means the property generates 25% more income than needed to cover debt service. Lenders use DSCR as a primary underwriting metric to assess loan risk — most commercial real estate lenders require a minimum DSCR between 1.20x and 1.35x. In syndication underwriting, DSCR must be modeled across the entire hold period to ensure loan covenants are maintained, especially during projected renovation or lease-up periods when NOI may be temporarily depressed.

Formula

DSCR = Net Operating Income (NOI) / Annual Debt Service (Principal + Interest)

Example

A property generates $960,000 in NOI with annual debt service of $720,000 (on a $12M loan at 6.5% over 30 years). The DSCR is $960,000 / $720,000 = 1.33x. The lender's minimum covenant is 1.20x, so the property has adequate coverage. However, if NOI drops 10% during a renovation to $864,000, the DSCR falls to 1.20x — right at the covenant threshold.

Why It Matters for Syndication

DSCR determines both your ability to secure financing and your loan terms. A strong DSCR means better rates, higher leverage, and more favorable covenants. In syndication deals with multiple loans (senior, mezzanine, supplemental), DSCR must be calculated for each loan individually and for the total debt stack. Syndication Analyzer models DSCR across up to 3 concurrent loans with year-by-year projections.

Related Terms

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