What is DSCR?
The Debt Service Coverage Ratio (DSCR) measures a commercial property's ability to cover its debt payments using its operating income. It is the primary metric lenders use to assess loan default risk.
The Formula
\[ \text{DSCR} = \frac{\text{Net Operating Income (NOI)}}{\text{Annual Debt Service}} \]
Lenders' Threshold Tiers
- **DSCR < 1.0**: Cash flow negative. The property does not generate enough income to cover the mortgage. Rejected immediately.
- **DSCR = 1.15 - 1.20**: Minimum bank threshold for low-risk properties (e.g., multi-family housing).
- **DSCR = 1.25 - 1.35**: Standard threshold for retail, office spaces, or mixed-use properties.
- **DSCR > 1.40**: Highly conservative, indicating strong cash flow buffers and favorable interest rates.