Money & Finance › Commercial real estate lending › Underwriting a property loan: DSCR, LTV and debt yield
Debt service coverage ratio (DSCR)
· Concept
Fact, law or dataA rule, statute, definition or measured number.
A building's net operating income divided by its yearly loan payments: how many times the income covers the mortgage.
See it on the Money & Finance map →How it works
DSCR = NOI ÷ annual debt service (principal plus interest). Example: $1.0 million of NOI and $800,000 of payments gives 1.25x, or $1.25 of income for each $1 owed. At 1.0x the building just breaks even. Lenders size loans to a minimum, usually 1.20–1.35x, using their own NOI with vacancy and reserves deducted, and many retest it each quarter or year as a covenant. Falling below a trigger can start a cash sweep; below the default level, the lender can call the loan.
Why it matters
It is the lender's main measure of whether the rent can carry the debt, so it often sets loan size when rates are high and is the covenant owners most often trip.
Think of it like
Like a margin of safety in an operating budget: 1.25x means NOI can fall 20% before the mortgage is no longer covered.
Facts, rules and data
Loan agreements and bank credit policies define it; Trepp and rating agencies report DSCR for every CMBS loan, and bank examiners review it.
Debates and risks
Lenders compute NOI differently, actual or underwritten, trailing or projected, so the same building can show quite different DSCRs.
Connections (4)
▸Archetype: a bank refinance of a suburban office building is tested against Debt service coverage ratio (DSCR)Fact, law or data
The connection
The bank divides its own estimate of NOI, after vacancy, reserves and leasing costs, by the new loan's annual payments. Office lenders in 2024–26 often want 1.30–1.40x, and many retest it each year. If a big tenant leaves, NOI drops, DSCR falls, and a cash sweep or default can follow.
When and why
In US bank office lending; the DSCR test and covenant are written into the loan agreement.
How we know
Bank credit policies and term sheets, and regulators' exam guidance on commercial real estate loans.
Debates and risks
How banks count income from tenants with near-term lease expirations varies widely between lenders.
▸Debt service coverage ratio (DSCR) below a trigger sets off Loan covenants, cash sweeps and lockboxesFact, law or data
The connection
The loan sets a DSCR floor, often 1.10–1.25x, tested quarterly. If net operating income falls, say after a big tenant leaves, the ratio drops below it, a springing lockbox switches on and surplus cash is swept into a reserve until DSCR stays above the trigger, usually for two quarters.
When and why
Written into CMBS, life-company and many bank loan agreements, and tested on the borrower's quarterly or annual operating statements.
How we know
Loan agreements spell out the triggers; CMBS servicer reports flag loans that have entered cash management or a cash trap.
Debates and risks
Whether sweeps help, by building a cushion, or hurt, by starving buildings of cash for tenant improvements, depends on how lenders release reserves.
▸Debt service coverage ratio (DSCR) measures how safely a building carries Leverage: amplifying gains and losses with debtFact, law or data
The connection
With NOI fixed, more debt means bigger payments and a lower DSCR. Example: $1 million of NOI; a $7 million loan at 6.5% on 25-year amortization costs about $567,000 a year, 1.76x; a $10 million loan costs about $810,000, 1.23x. The second leaves only a 19% income cushion before payments go uncovered.
When and why
In every income-property loan; lenders set a minimum DSCR as a cap on leverage.
How we know
Standard amortization math; loan agreements and credit policies tie loan size to DSCR.
Debates and risks
Whether DSCR or LTV better guards against default depends on the cycle; after 2022 both failed some lenders.
▸Debt service coverage ratio (DSCR) is the first test in Underwriting a property loan: DSCR, LTV and debt yieldFact, law or data
The connection
Lenders run DSCR, LTV and debt yield and lend the smallest amount that passes all three. When rates are low, LTV usually binds; when rates are high, as since 2022, DSCR or debt yield often binds, shrinking loans even where values hold.
When and why
In US commercial lending at banks, CMBS lenders, life companies and the agencies.
How we know
Lender term sheets and credit policies, and rating agencies' CMBS criteria listing minimum DSCRs.
Debates and risks
Whether to test DSCR at the actual rate or a stressed higher rate is a judgment call that varies across lenders.