DSCR (Debt Service Coverage Ratio)
A measure of a property's ability to cover its debt payments, calculated by dividing Net Operating Income by total annual debt service.
Definition
Debt Service Coverage Ratio (DSCR) is a critical metric used by lenders to evaluate whether a property generates enough income to cover its mortgage payments. A DSCR of 1.0 means the property's NOI exactly equals its debt obligations—anything below 1.0 indicates negative cash flow. Most commercial lenders require a minimum DSCR between 1.20 and 1.35 for small bay industrial properties, meaning the property must generate 20-35% more income than needed to service the debt. Higher DSCRs indicate lower risk and may qualify for better loan terms. Investors also use DSCR when underwriting acquisitions to stress-test deals against vacancy, rent declines, or expense increases.
Formula
DSCR = Net Operating Income (NOI) / Annual Debt ServiceExample
A small bay property has $180,000 NOI and annual mortgage payments of $140,000 (principal + interest). DSCR = $180,000 / $140,000 = 1.29. This meets most lender requirements, with a $40,000 annual cushion above debt obligations.