The Debt Service Coverage Ratio is one of the items that a lender looks at when evaluating / underwriting a commercial real estate loan. The calculation is very simple, but many borrowers get confused.
Calculation: EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization) / Mortgage Payment = Deby Service Coverage Ratio (DSCR)
EBITDA: $10,000 / Loan Payment: $7,500 = DSCR: 1.33
EBITDA: $6,000 / Loan Payment: $7,500 = DSCR: 0.80
Each lender has their own DSCR number requirement based on their risk appetite, and the specific property type.
For example;
The U.S. Department of Housing and Urban Development (HUD) provide mortgage guarantees for loans on multifamily properties through their 221d and 223f programs.
They recently lowered the debt service coverage ration to a rate of: 1.11 or 1.15. This will make it is easier for a multifamily property to be eligible for a loan. Look at the Net Income required in the calculator above, for a DSCR or 1.1 versus 1.3.
In the healthcare lending for HUD insured loans (Section 232/223(a)7) the debt service coverage ratio numbers are:
- 1.45 for Skilled Nursing Facilities
- 1.30 for Assisted Living
- 1.25 for Independent Living
Commercial Lenders
The DSCR number that is constantly used when discussing commercial lenders is 1.25. This is a meaningless misnomer, because commercial is too wide of a range to say.
Other thing to take into account.
When looking to refinance a commercial real estate loan, the debt service coverage ratio is just one of the underwriting factors. Lenders will be checking; Loan to Value ratio, Market Comparisons, Appraised Value, and Existing Debt just to name a few.