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# 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.

 Net Operating Income (NOI): Gross Operating Income (\$/year) Vacancy Loss (\$/year) Operating Expenses (\$/year) Debt Service: Loan Amount Loan Term (years) Interest Rate (%)
 NOI: Debt Service: Debt Service Coverage Ratio:

## 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.

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.