Also known as DSCR or Debt Coverage Ratio (DCR). This is widely considered the most important factor in determining a Commercial Mortgage / Income Property's credit worthiness. Loosely defined, the DSCR is a ratio of the Commercial Property’s liabilities to the Property’s income. A DSCR of 1.00 would equate to an Income Property breaking even.

Calculating DSCR

In order to properly Calculate a Commercial /Income Properties DSCR one must first determine:

1) The Net Operating Income (NOI)

2) The Debt Service (Mortgage) of the Property

The calculation from this point is simple:

NOI / Debt Service = DSCR

Example

A Strip Mall has a Net Operating Income of $1,300,000. Its Debt Service Payments are roughly $83,000 a month or $1,000,000 per year.

In order to calculate the DSCR you would divide 1,300,000 by 1,000,000 which would equal a DSCR of 1.3

Commercial Lenders typically want to see a DSCR of 1.25, meaning the property has a net income 25% greater than its debt.

Bankapedia's Take

A Commercial Mortgage’s viability largely depends on the DSCR. While a property may not be attractive to your standard passerby, a strong DSCR can make all the difference. In a residential mortgage, the lender will look at an individual’s ability to make the monthly payments; in a commercial mortgage, a lender will take the time to scrutinize a property's ability to meet its debt obligation. The DSCR will often supersede a borrower's FICO score and even down payment. A high DSCR of 1.3 or above can enable a borrower with a low FICO and little down payment to get a mortgage on a property.