What the debt service coverage ratio (DSCR) is, how to calculate it, what a good DSCR is for commercial loans and how lenders use it to size a loan.
The debt service coverage ratio (DSCR) measures whether a property’s income covers its loan payments. It is net operating income divided by total debt service.
Lenders use it to size commercial loans. Most want a DSCR of at least 1.1 to 1.4, and 1.25 is a common minimum. It is a core part of how commercial real estate loans are sized.
DSCR is also called the debt coverage ratio (DCR). On an income property it often decides the loan amount more than the purchase price does. Buyers who understand it can predict how much a lender will offer before they apply.
How to Calculate DSCR
To calculate DSCR, divide net operating income by the annual debt service.
DSCR = NOI / Annual debt service
For example, NOI of $36,000 and annual debt service of $30,000 give a DSCR of 1.2. The property earns 20% more than its loan payments. The first step is how to calculate net operating income.
What counts as debt service
Debt service is the total of principal and interest payments on the loan over a year. Include every loan secured by the property, such as a second mortgage. Lease payments the borrower must make, such as a ground lease, are also counted in some definitions.
NOI is measured before financing, income taxes, depreciation and capital spending. Do not subtract loan payments from NOI before dividing, or the ratio is counted twice.
Worked example: the Grand Junction building
The figures below are an illustration, not a loan quote. The same five-suite, 10,000-square-foot building appears in our guides to NOI and cash-on-cash return on the same deal. It also anchors the pro forma a lender will test.
| Item | Amount |
|---|---|
| Effective gross income | $184,000 |
| Operating expenses (including property tax and a reserve) | $64,000 |
| Net operating income | $120,000 |
| Loan amount | $1,155,000 |
| Assumed rate and amortization | 6.75%, 25 years |
| Monthly payment | $7,980 |
| Annual debt service | $95,760 |
| DSCR ($120,000 / $95,760) | 1.25 |
The building earns 25% more than it needs to make the loan payments. A $24,240 cushion remains for vacancy, repairs and the owner’s return.
How to read the ratio
| DSCR | What it means |
|---|---|
| Below 1.00 | Income does not cover the payments; the owner must add cash |
| 1.00 | Income exactly covers the payments, with no cushion |
| 1.10 – 1.20 | Thin cushion; accepted by some lenders on lower-risk loans |
| 1.25 | A common commercial real estate minimum |
| 1.35 and above | Comfortable coverage; may earn better loan terms |
What Is a Good DSCR?
For commercial real estate, a DSCR of 1.25 or higher is a common lender minimum.
Lender minimums typically range from 1.1 to 1.4. A DSCR of 1.25 means the property’s NOI is 25% greater than its annual debt service. Below 1.0, the property does not cover its payments: at 0.95, it covers only 95% of them.
Commercial banks generally ask for about 1.15 to 1.35. Banks have traditionally wanted around 1.20 or more for investment properties. Some investor-focused lenders accept lower ratios under specific programs, usually with a higher rate or a lower loan amount.
Lenders set their own minimums by loan program and property type. A building with one tenant, short leases or a specialized use usually needs more cushion than a stabilized, multi-tenant building. Ask each lender for its minimum before you write an offer.
A ratio below 1.0 is a warning, not an automatic default. Owners can carry a shortfall from reserves or other income for a time. Lenders, however, will not originate a new loan on that basis.
How Lenders Use DSCR to Size a Loan
A lender caps the loan payment so the property’s NOI covers it by the required ratio.
Take a shopping mall that collects $300,000 a month from tenants and pays $50,000 a month in expenses. At 1.1 coverage, a lender would allow monthly loan payments of no more than about $227,273. Lenders check loan-to-value for commercial property as well.
Sizing a loan step by step
- Underwrite NOI. The lender builds its own NOI from the rent roll and operating history, not from the listing.
- Divide NOI by the required DSCR. This is the maximum annual debt service.
- Divide the maximum debt service by the loan constant. The loan constant is yearly debt service per dollar borrowed.
- Compare with the other tests, such as loan-to-value and debt yield, and lend the lowest result.
For the illustration, $120,000 divided by 1.25 allows $96,000 of yearly debt service. At 6.75% over 25 years, that supports a loan of about $1,158,000.
| Required DSCR | Maximum annual debt service | Maximum loan (6.75%, 25 years) |
|---|---|---|
| 1.20 | $100,000 | About $1,206,000 |
| 1.25 | $96,000 | About $1,158,000 |
| 1.35 | $88,889 | About $1,072,000 |
DSCR, LTV and debt yield together
Most commercial lenders apply more than one test and take the lowest loan amount.
| Test | Formula | Illustration result |
|---|---|---|
| Loan-to-value at 70% | Price or appraised value x 70% | $1,190,000 |
| DSCR at 1.25 | NOI / 1.25 / loan constant | About $1,158,000 |
| Debt yield at 10% | NOI / 10% | $1,200,000 |
At 70% of the $1,700,000 price, the loan would be $1,190,000. Its payments of $98,662 a year would give a DSCR of only 1.22. Coverage, not value, sets the loan, so the buyer must bring more cash.
Debt yield is NOI divided by the loan amount. It does not depend on the rate or amortization, so a lender cannot make it look better by stretching loan terms. A 10% minimum is a common example, and bridge and construction loans usually require more than permanent loans.
Stress-Testing DSCR
A ratio that passes at closing can fail later, so lenders and careful buyers test it under worse conditions.
Rate stress (same $1,155,000 loan, 25-year amortization)
| Rate | Annual debt service | DSCR |
|---|---|---|
| 5.75% | $87,194 | 1.38 |
| 6.75% | $95,760 | 1.25 |
| 7.75% | $104,689 | 1.15 |
Vacancy stress (6.75% loan)
| Vacancy and credit loss | NOI | DSCR |
|---|---|---|
| 5% | $125,700 | 1.31 |
| 8% | $120,000 | 1.25 |
| 15% | $106,700 | 1.11 |
| 20% (vacant suite stays empty) | $97,200 | 1.02 |
The break-even occupancy is the share of potential income needed to pay operating costs and the loan. Here it is ($64,000 + $95,760) / $200,000, or about 80%. Below that, the owner pays the loan from other money.
Rate stress matters most at refinance. A loan written at a low rate may not refinance for the same balance if rates are higher at maturity.
How to Improve DSCR
Every route to a better ratio either raises NOI or lowers the yearly payment.
- Lease vacant space before refinancing, so the lender underwrites a fuller building.
- Renew below-market leases at market rent.
- Cut or recover operating costs, including a reconciled CAM budget.
- Borrow less. A larger down payment shrinks the payment directly.
- Ask for a longer amortization. Spreading principal over more years lowers the yearly payment, though more interest is paid over time.
- Consider partial interest-only terms where a lender offers them, knowing the balance does not fall during that period.
In the illustration, leasing the empty suite at market raises potential rent by $40,000 a year. Even after vacancy and management, that is the single largest lever on coverage.
DSCR for owner-occupied buildings
When a business buys the building it occupies, the rent it pays itself is not the real test. Lenders look at the business’s cash flow and the owner’s wider finances as well as the property. Programs built for these buyers are covered in owner-occupied commercial loans in Colorado and SBA 504 financing for Colorado buildings.
Using DSCR After Closing
DSCR keeps mattering after the loan funds. Loan agreements often require updated rent rolls and operating statements on a set schedule, which lets the lender track coverage.
Read the loan documents for any ongoing coverage test and what happens if the property falls below it. An attorney or the lender can explain the specific terms.
DSCR in Colorado’s 2026 Market
In 2026, higher interest rates make coverage tighter, which limits refinancing. RMCRE brokers report that interest rates and refinancing pressure are shaping owners’ decisions across Colorado. See refinancing commercial property.
Low cap rates make coverage harder still. RMCRE’s 2026 year-to-date Aspen report shows cap rates of 4.5% to 6.0%. If the illustration building traded at a 5% cap rate, its price would be $2,400,000. A 68% loan on that price would cost about $135,300 a year, for a DSCR of 0.89.
The same NOI priced at Montrose’s reported 8% cap rate for Q2 2026 gives a $1,500,000 price. A 68% loan would then cost about $84,600 a year, for a DSCR of 1.42. In resort markets, buyers often need far more equity than the lender’s LTV limit suggests.
Property tax also moves DSCR. Colorado reappraises in odd-numbered years and collects tax a year in arrears. A higher value from the 2027 reappraisal would raise the tax bill paid in 2028. The 2026 commercial assessment rate of 25%, down from 27% in 2025, helped coverage. In Pagosa Springs’ Q2 2026 market report, local brokers cite persistently elevated interest rates as a reason for buyer caution.
Common DSCR Mistakes
- Using the seller’s pro forma NOI. Lenders underwrite actual and in-place income, plus a vacancy allowance.
- Leaving out management or reserves. A self-managing seller may show no fee, but a new owner will pay one.
- Using interest-only payments when the loan will amortize, which overstates coverage.
- Ignoring other secured debt, such as a seller carryback or second loan.
- Assuming the lender’s LTV limit sets the loan. On many deals, coverage sets it lower.
- Forgetting the refinance test at a higher future rate.
Frequently Asked Questions
What is the minimum DSCR for a commercial loan?
Many commercial lenders use 1.25 as a baseline minimum. Commercial banks generally ask for about 1.15 to 1.35, depending on the property and loan program. Check with each lender before relying on a number.
What does a DSCR of 1.25 mean?
It means NOI is 25% greater than the annual loan payments. For every $1.00 of debt service, the property earns $1.25 of net operating income.
Is a higher DSCR always better?
For safety, yes: a higher ratio means a larger cushion. But a very high ratio can mean the owner is using less debt than the property could support. Investors balance coverage against return.
Can you get a commercial loan with a DSCR below 1.0?
New permanent loans are rarely made below 1.0, since the property cannot pay its own debt. Some lenders accept a lower in-place ratio on a bridge loan when a clear plan exists to raise income. See how bridge loans fill the gap.
How is DSCR different from debt yield?
DSCR compares NOI with the yearly loan payment, so the rate and amortization change it. Debt yield compares NOI with the loan amount, so it does not. Lenders often use both.
Do lenders use the property’s DSCR or the borrower’s?
For investment property, lenders focus on the property’s own NOI. For owner-occupied buildings, they often look at the business’s cash flow and the owner’s wider finances too.
Finance Strategy for Colorado Owners
RMCRE’s consulting work covers finance strategy and investment analysis for owners and investors. For lenders who know these markets, see Colorado lenders in the RMCRE network.
Rocky Mountain Commercial Real Estate has linked partner brokers across Colorado mountain towns since 2010. We can underwrite NOI the way a lender will, before you make an offer; reach us through the RMCRE contact page.
