How commercial lenders look at DSCR

For a commercial property, the lender cares most about whether the building's income can pay the loan. The debt service coverage ratio, or DSCR, is how they measure that. The concept is the same as for a small rental, but the details are stricter.

Coverage targets

Commercial DSCR is the property's net operating income (NOI) for a year divided by the year's loan payments (principal and interest). Lenders usually set a minimum, often somewhere between about 1.20 and 1.35 depending on the property type and the lender. Stable multifamily properties tend to sit at the lower end of that range. Retail, office, hospitality and special-use properties can require more cushion because their income is considered riskier.

NOI the lender's way

NOI is rental income minus operating expenses, before loan payments. Lenders do not simply accept your figures. They usually:

• Apply a vacancy and credit-loss allowance, even if the building is full today.
• Include a management fee, even if you manage it yourself.
• Include replacement reserves, and adjust expenses to market levels.
• Review leases, tenant strength and when leases expire.

This means a lender's NOI is often lower than the owner's. Ask early how the lender will underwrite your property.

Sizing the loan

Lenders often work backward from NOI to find the largest loan the property supports. Example, not a quote: with $240,000 of NOI and a 1.25 DSCR target, the maximum yearly payment is $192,000 ($240,000 ÷ 1.25). The loan amount that payment supports depends on the interest rate, amortization and term. Loan-to-value limits, often in the range of about 65% to 80%, also cap the loan.

Send your scenario

To get a fast, useful answer, include the property type and address, the purchase price or value, a rent roll and 12 months of operating statements, the loan you are looking for and a short summary of your experience. Our commercial loan checklist lists everything lenders usually ask for. A loan officer can then tell you which lenders fit your deal.