Debt Service Coverage Ratio (DSCR) in Commercial Real Estate: Complete Guide

What It Means

The Debt Service Coverage Ratio measures a property's ability to cover its mortgage payments from operating income. A DSCR of 1.25x means the property generates 25% more income than needed to cover debt payments. DSCR is the primary metric lenders use to evaluate commercial real estate loan risk and set loan terms.

How It's Calculated

Numerator: Net Operating Income (see NOI guide). Denominator: Annual Debt Service = total annual principal + interest payments on all property-level debt. A DSCR of 1.0x means the property exactly covers its debt — any reduction in income results in an inability to make payments. Most CRE lenders require minimum DSCRs of 1.20x-1.35x depending on property type and market.

Common Mistakes

Using projected NOI rather than in-place NOI for loan qualification; calculating DSCR on gross income rather than NOI; not accounting for variable-rate debt service adjustments; ignoring lease rollover risk that may reduce NOI below debt service requirements.

Connection to Lease Abstraction and Financial Spreading

DSCR depends directly on NOI accuracy (requiring precise financial spreading and lease abstraction) and debt terms. Lease provisions that affect income certainty — below-market renewal options, co-tenancy provisions, upcoming expirations — directly impact risk-adjusted DSCR calculations.