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Housing Unpacked
Glossary

Debt service coverage ratioDSCR

Net operating income divided by annual debt service; a lender's measure of how much cushion a building has before it can no longer make its loan payments.

The debt service coverage ratio tells a lender how many times over a building's income can pay its mortgage. A ratio of 1.00 means net operating income exactly equals debt service, with nothing to spare. Lenders require a ratio above 1.00 so that a dip in rents or a rise in expenses does not immediately put the loan in default.

Debt service coverage ratio
DSCR = NOI ÷ annual debt service

Assume NOI of $1,851,000 and annual debt service of $1,183,231. DSCR = 1.56, meaning income could fall by about a third before the building could no longer cover its loan.

DSCR is one of the tests that sizes a loan. If a lender requires a minimum coverage ratio and the projected NOI is fixed, the maximum debt service is NOI divided by that minimum, and the maximum loan follows from the mortgage constant. Higher interest rates raise the constant, shrink the loan that a given NOI can support, and push more of the cost onto equity.

The connection to rent is direct. When a lender tightens its minimum coverage, or when rates rise, a developer can borrow less against the same building. The shortfall must be covered with more expensive equity or the project must earn more income, which in a new building means higher rent.

Where this comes up

Analysis that uses debt service coverage ratio in the arithmetic.

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