Finance & Accounting
Definition
DSCR measures a property's or business's ability to cover its debt payments from operating income. DSCR = Net Operating Income ÷ Total Debt Service. A DSCR above 1.0 means income exceeds debt payments; below 1.0 means income is insufficient to cover debt. Lenders typically require DSCR of 1.20–1.25x or higher for commercial real estate loans.
For commercial real estate: DSCR = NOI (Net Operating Income) ÷ Annual Debt Service. NOI = gross rental income minus operating expenses (excluding debt service). Annual debt service = principal + interest payments for the year. A DSCR of 1.25 means the property generates 25% more income than needed to cover debt — providing a cushion against vacancies or expense increases. Lenders use DSCR as a primary underwriting metric: most commercial mortgages require 1.20–1.30x. For business loans, lenders calculate DSCR using EBITDA or cash flow: DSCR = EBITDA ÷ Debt Service. Low DSCR limits how much debt a property or business can support. Investors optimize NOI (through higher rents, lower vacancy, expense control) to improve DSCR and unlock higher leverage.
DSCR determines how much financing you can obtain on a property or business. Understanding your DSCR before approaching lenders allows you to optimize the capital structure, identify properties that qualify for your target leverage, and avoid surprises in the underwriting process. A financial advisor or real estate consultant can model DSCR across scenarios and help you structure deals that meet lender requirements.