Glossary
Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio (DSCR) measures how many times a property's or business's cash flow covers its required debt payments. It equals net operating income, or cash flow available for debt service, divided by annual principal and interest. A DSCR above 1.00x means cash flow exceeds debt service.
Formula
Example
A property produces net operating income of $600,000 per year. The proposed loan carries annual principal and interest payments of $480,000. DSCR = $600,000 / $480,000 = 1.25x, meaning the property generates $1.25 of income for every $1.00 of debt service. If NOI fell 20% to $480,000, DSCR would drop to 1.00x, the point at which cash flow only just covers the payments.
How it is used in underwriting
DSCR is the primary repayment test in commercial real estate and business lending. Lenders use it two ways: to check whether a requested loan is supportable, and to size the maximum loan. To size, the underwriter divides NOI by the minimum DSCR to find the maximum debt service, then converts that payment into a loan amount using the rate and amortization. Because higher rates raise debt service, the same property supports a smaller loan when rates rise. DSCR also appears in loan covenants, where falling below a stated level can trigger cash sweeps, reporting requirements or default.
The ratio is only as good as its inputs. Common mistakes include using in-place NOI that ignores a replacement reserve or below-market management fee, calculating on interest-only payments when the loan amortizes later, and mixing trailing and projected figures. In business lending, the numerator is usually EBITDA or cash flow less unfunded capital expenditures, taxes and distributions, and many lenders calculate a global DSCR that includes the guarantor's personal income and debts. Real estate investors sometimes quote a DSCR based on optimistic pro forma income; lenders typically underwrite to trailing or in-place numbers instead.
Typical benchmarks
Commercial real estate lenders commonly look for 1.20x to 1.35x, with higher minimums for hotels and other volatile property types. Small business and SBA lenders often cite roughly 1.15x to 1.25x on a global basis. A DSCR below 1.00x means cash flow does not cover debt service.
Run the numbers: DSCR Calculator
Frequently asked questions
What is a good DSCR?
For most commercial real estate loans, lenders commonly treat 1.25x as a reasonable minimum, with stronger deals at 1.35x or higher. Riskier property types such as hotels usually require more coverage. For small business loans, lenders often accept somewhat lower ratios when the guarantor has strong outside income or collateral.
How do you calculate DSCR for a business?
Divide cash flow available for debt service by total annual debt payments. Cash flow is usually EBITDA, adjusted for owner compensation and non-recurring items, minus unfunded capital expenditures, cash taxes and distributions. Debt service includes principal and interest on the new loan plus any existing business debt that will remain after closing.
What happens if DSCR falls below the covenant?
A DSCR covenant breach can trigger consequences set out in the loan agreement, such as a cash sweep, a requirement to pay down principal, increased reporting or an event of default. Many borrowers negotiate a cure period or equity cure. Lenders usually start with a conversation and a waiver or amendment rather than immediate acceleration.
Related terms
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