Which formula correctly defines the debt-service coverage ratio (DSCR)?

Which formula correctly defines the debt-service coverage ratio (DSCR)?

• A. DSCR = Net Operating Income / Gross Revenue.
• B. DSCR = Net Operating Income × Total Debt Service.
• C. DSCR = Net Operating Income / Total Debt Service.
• D. DSCR = Total Debt Service / Net Operating Income.

Answer: (C)

DSCR measures how well a property's or borrower's income can cover debt payments in a given period. The key idea is to compare cash flow available after operating costs to the debt obligations that must be paid. The correct formula uses Net Operating Income in the numerator and Total Debt Service in the denominator. Net Operating Income represents the cash flow from operations after ordinary operating expenses, excluding financing costs. Total Debt Service is the total required payments on debt (principal and interest) for the period. Dividing NOI by debt service shows how many times the income can cover the debt payments, which is what lenders want to know. For example, if NOI is 1,000,000 and annual debt service is 800,000, the DSCR is 1.25, indicating a cushion to meet debt obligations. The other approaches don’t fit because they either use gross revenue instead of operating cash flow, multiply NOI by debt service, or invert the relationship. Using gross revenue ignores operating costs, multiplying would distort the ratio, and inverting would give the debt service burden per dollar of income rather than the coverage factor. In practice, a DSCR greater than 1 means there is enough income to cover debt service, with higher numbers indicating stronger cushion. Lenders often look for a minimum DSCR (commonly around 1.2 or higher) when evaluating loan requests.

DSCR measures how well a property's or borrower's income can cover debt payments in a given period. The key idea is to compare cash flow available after operating costs to the debt obligations that must be paid.

The correct formula uses Net Operating Income in the numerator and Total Debt Service in the denominator. Net Operating Income represents the cash flow from operations after ordinary operating expenses, excluding financing costs. Total Debt Service is the total required payments on debt (principal and interest) for the period. Dividing NOI by debt service shows how many times the income can cover the debt payments, which is what lenders want to know.

For example, if NOI is 1,000,000 and annual debt service is 800,000, the DSCR is 1.25, indicating a cushion to meet debt obligations.

The other approaches don’t fit because they either use gross revenue instead of operating cash flow, multiply NOI by debt service, or invert the relationship. Using gross revenue ignores operating costs, multiplying would distort the ratio, and inverting would give the debt service burden per dollar of income rather than the coverage factor.

In practice, a DSCR greater than 1 means there is enough income to cover debt service, with higher numbers indicating stronger cushion. Lenders often look for a minimum DSCR (commonly around 1.2 or higher) when evaluating loan requests.