Debt Service Coverage Ratio (DSCR) Calculator

Use the Debt Service Coverage Ratio (DSCR) calculator to calculate your companys' Debt Service Coverage Ratio (DSCR). The Debt Service Coverage Ratio (DSCR) allow you to decide if you should accept a loan based on your business cashflow(s). The higher the ratio, the lower the risk is to your company and the more likely you are to have access to lower rate interest loans from business loan lenders.

Debt Service Coverage Ratio (DSCR) Calculator
Net Operating Income (NOI):
Gross Operating Income ($/year)
Vacancy Loss ($/year)
Operating Expenses ($/year)
Debt Service:
Loan Amount
Loan Term (years)
Interest Rate (%)
Debt Service Coverage Ratio (DSCR) Results
NOI:
Debt Service:
Debt Service Coverage Ratio:
[ 1 Votes ]

Why is DSCR important for commercial properties?

Debt Service Coverage Ratio, abbreviated as DSCR or DCR is very important when it comes to real estate finance and commercial lending, especially when it concerns underwriting commercial real estate, tenant financials as well as business loans. The most important thing about DSCR is that it plays a vital role in understanding the maximum loan amount you can avail.

Debt Service Coverage Ratio - The Basics

Debt Service Coverage Ratio Explained (DSCR) is a number that supports the decision of whether or not a commercial mortgage loan can be funded. It is this value that is responsible for increasing or decreasing the loan amount. DSCR is not at all a complicated thing to understand. Instead, it gives a clear picture of whether the debt service of a given loan amount at a given interest rate will get coverage by the NOI (Net Operating Income) produced by the building.

The mortgage rate can never be higher than the cap rate as in this case the building will not debt service. The debt service coverage ratio or DSCR is defined as the ratio of the NOI or the Net Operating Income and the Total Debt Service.

Debt Service Coverage Ratio Formula

Debt Service Coverage Ratio (DSCR) = Net Operating Income/Total Debt Service

Debt Service Coverage Ratio Explained

As with most financial ratios, DSCR provides a directional figure from which financial decision can be made:

  • A DSCR greater than 1 means there will be enough cash flow to cover the debt service.
  • A DSCR below 1 means there is not enough cash flow to cover the debt service.

It is ,however, a misconception that a DSCR of 1 is everything that is required. A lender usually requires a debt service coverage ratio higher than 1 to have a protective backup in case something is wrong. This means that if there is a 1.20x debt service coverage ratio, there is enough cushion so that no NOI could decline it by 16.7% and still all the debt service obligations get covered.

What is the minimum or appropriate debt service coverage ratio?

There is no perfect value for this answer, it varies from bank to bank, and depends on the type of property and loan. The typical DSCR requirements usually vary from 1.20x-1.40x. For instance, in a commercial mortgage loan, the strong and stable properties fall on the lower end of the range whereas the properties with greater risks and short-term leases fall on the higher end.

Adjustments to NOI

Reserves are savings for future capital expenditures which are very important replacements or repairs to sustain the property for a very long period. They also affect the capacity of a borrower to service the debts. A property, managed by the owner, might provide some savings to the owner but the lender may not consider all these savings within the DSCR calculation.

Since the calculation of debt service coverage ratio is a tedious and time consuming task, the DSCR calculator is preferred to manual evaluation. The Debt Service Coverage Ratio Calculator gives you the perfect number related to various calculations involved like tenant improvement and leasing commission calculations. All these are essential for attracting good tenants as well as achieving full or market-based occupancy.

DSCR for a business

The debt service coverage ratio is quite helpful when the financial statements of an organization must be analysed. The figures are also useful when we want to analyse tenant financials while securing a business loan or when planning finances for commercial properties occupied by owners. The basic concept of taking the cash flow and dividing by debt service is the same.

Global DSCR

The debt service coverage ratio calculator has a different calculation when it comes to global calculations. This calculation should look at both the owner and the business to provide an accurate picture of the cash flow and DSCR

While doing global analysis the business owner's personal income, as well as the personal debt service, is included. If the owner takes a very high salary from the business, the DSCR is very low. In the new global debt service coverage relation, the salary is used as the cash flow. The personal debt services along with the living expenses also come under cash flows.

Summary

The Debt Service Coverage Ratio is very important ratio for lenders when they are underwriting a loan, it is also important for businesses involved in property. On an individual level, DSCR is important for you to understand your relative risk to lenders and the potential outcome that may have when borrowing money. This is useful as you can take steps to improve your DSCR. If the Debt Service Coverage Ratio still sounds a bit complicated to calculate manually, do not worry anymore, leave your DSCR calculation to the debt-to-service ratio calculator.