The Debt Coverage Ratio is very commonly used in real estate investment analysis where leverage is used. Loan, Debt, Debt Service, Financing, Leverage all mean receiving money with a repayment plan with the property or more as collateral. There are so many different ways to structure a loan that I won't begin to go through the different methods, but they all have a loan amount and debt service. The institution usually uses two methods to figure out how much to loan on a commercial real estate property. Loan to Value (LTV) and Debt Coverage Ratio (DCR), and usually picks the method that creates the lowest initial loan amount. The Loan to Value is based of a percentage of the purchase price. The Debt Coverage Ratio creates a ratio that represents how much net operating income there is to cover the debt created by all the loans on the property.

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Debt Coverage Ratio (DCR)
for commercial real estate
investments and
developments

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Why is Debt Coverage Ratio (DCR) useful for
commercial real estate?
The Debt Coverage Ratio is very commonly used in real estate investment analysis
where leverage is used. Loan, Debt, Debt Service, Financing, Leverage all mean
receiving money with a repayment plan with the property or more as collateral. There
are so many different ways to structure a loan that I won't begin to go through the
different methods, but they all have a loan amount and debt service. The institution
usually uses two methods to figure out how much to loan on a commercial real estate
property. Loan to Value (LTV) and Debt Coverage Ratio (DCR), and usually picks the
method that creates the lowest initial loan amount. The Loan to Value is based of a
percentage of the purchase price. The Debt Coverage Ratio creates a ratio that
represents how much net operating income there is to cover the debt created by all the
loans on the property.

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Debt Coverage Ratio (DCR)
Considers / Ignores
• Considers: Scheduled Income, Vacancies (Current Year Only),
Expenses (Current Year Only), Debt Payment (Current Year
Only)
• Ignores: Time Value of Money, Sale Proceeds, Loan Balance
repayments, Other Years NOI and Debt Service.
... and a lot of other things

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• Expenses
• Scheduled Income (Rent Increase/Decrease, Vacancy,
Reimbursements, Free Rent)
• Debt Payment (Loan Amount, Loan Interest Rate,
Amortization Period)
What is the
Debt Coverage Ratio (DCR)
Sensitive to?

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Debt Coverage Ratio (DCR) Example
2010 Net Operating Income (NOI) $276,987
divide by total debt service $230,823
equals the 2010 Debt Coverage Ratio (DCR) 1.200
2010 2011 2012 2013 2014
2015
Total Gross Income $365,472 $372,443 $370,410 $376,040 $384,217 $414,321
Less: Vacancy & Credit Loss 19,084 3,202 14,620 5,049 3,501 50,321
Effective Income $346,387 $369,241 $355,790 $370,992 $380,717 $364,000
Total Operating Expenses $69,400 $71,244 $73,141 $75,094 $77,103 $79,170
Net Operating Income $276,987 $297,997 $282,649 $295,898 $303,614 $284,830
Total Debt Service $230,823 $230,823 $230,823 $230,823 $230,823 $230,823
Debt Coverage Ratio 1.200 1.291 1.225 1.282 1.315 1.234

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Watch Video
about Debt Coverage Ratio (DCR)

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