Definition: DSCR or Debt Service Coverage Ratio
DSCR or Debt Service Coverage Ratio is used every day by a commercial lender to assess loan requests. I’ll share definitions for CRE lending as well as C&I (aka business lending) lending today although they are calculated the same way, the terms we use to describe the numbers used slightly differ.
CRE DSCR: The DSCR on a commercial real estate loan is calculated as NET OPERATING INCOME or NOI divided by TOTAL ANNUAL DEBT SERVICE. For example, let’s assume a retail investment property has an NOI of $250,000 and the annual debt service (monthly loan payment x 12) is $180,000. The DSCR would be calculated as 250,000 divided by 180,000 or 1.39x. Most lenders look for a DSCR of 1.15x to 1.30x depending on the property type, tenant quality (are they credit grade or local/small business?) and sometimes other factors so check with your lender to know their requirements.
C&I DSCR: The calculation is exactly the same as above but when assessing an operating company we don’t normally use NOI but instead look at EBITDA (Earnings Before Interest Tax Depreciation and Amortization). You would take the company EBITDA divided by TOTAL ANNUAL DEBT SERVICE to determine DSCR. Most of the time when it comes to conventional lending, banks will look for a 1.20x to 1.25x DSCR for C&I lending. In some exceptions such as SBA lending you might see that drop to 1.15x or even less.