Debt Service Coverage Ratio (DSCR)

DSCR = qualifying recurring cash flow ÷ qualifying annual debt service. A ratio above 1.00 means the tested cash flow exceeds the tested debt payments; a ratio below 1.00 means it does not.

For an income-producing property, the numerator is commonly normalized property NOI. For an owner-occupied commercial mortgage, the lender may instead analyze business cash flow or a broader global debt-service measure. The label DSCR should therefore be accompanied by a clear definition of both numerator and denominator.

An apartment building can be analyzed by comparing property NOI with the property mortgage. An owner-occupied manufacturer may be analyzed from normalized business earnings/cash flow against business and real-estate debt obligations. A mixed-use or related-company structure can require reconciliation across both.

Using property NOI for an operating business, or business EBITDA for a passive rental building, can answer the wrong question. The repayment engine determines the relevant coverage model.

For rental real estate, begin with normalized NOI, not gross rent. Vacancy, concessions, management and recurring operating expenses can materially change the numerator. For a business, normalization can address non-recurring items, related-party transactions, owner compensation and other factors depending on the lender’s analysis.

A one-time strong year is not automatically the correct numerator. Commercial coverage is meant to test recurring repayment capacity.

Annual debt service can change with interest rate, amortization, payment type, subordinate financing and whether the lender tests the proposed payment or another qualifying payment. A calculation using only a first mortgage can overstate coverage if additional required debt depends on the same cash flow.

Keep the time period consistent. Annual cash flow belongs over annual debt service, not over a single monthly payment.

A figure such as 1.20× or 1.25× is often used as an illustration, but lenders can require different coverage according to property type, leverage, term, amortization, tenancy, business risk and program. A named insured program can also publish its own minimum.

CMHC MLI Select is a useful example: current published criteria include a 1.10 DCR minimum for standard rental housing under applicable program conditions. That number belongs to MLI Select; it is not a general Canadian commercial-mortgage rule.

If the lender’s required coverage is known, required NOI = annual debt service × required DSCR. Conversely, maximum debt service = NOI ÷ required DSCR.

This is more useful than treating DSCR only as pass/fail because it shows how much income the financing terms require or how much annual debt service a property can support before payment assumptions are converted into principal.

Suppose normalized NOI is $360,000 and annual debt service is $288,000. Base DSCR is 1.25×. If NOI falls 10%, coverage falls to 1.125×. If debt service rises 10%, it falls to about 1.136×. If both occur together, the ratio falls to roughly 1.023×.

That sensitivity explains why lease rollover, operating-cost inflation and interest-rate exposure matter even when the opening ratio passes.

A bridge loan may use interest-only payments that appear easy to cover while the property is being renovated or leased. Permanent financing can require principal-and-interest payments under a different rate and amortization. Passing current-pay bridge coverage therefore does not prove the planned takeout works.

A credible bridge analysis tests the financing that exists today and the coverage expected when the exit lender evaluates the stabilized property.

Longer amortization or a lower rate reduces annual debt service and can improve DSCR even though principal and value are unchanged. That is why debt yield and LTV remain separate lenses.

A favourable payment denominator should not conceal weak leverage, concentrated tenancy, environmental problems or inadequate liquidity.

The Commercial DSCR Math page owns the compact formula, backwards-solving steps and calculator workflow. This page owns the deeper questions: which cash flow belongs in the numerator, which debt belongs in the denominator, what threshold actually applies and whether the result remains meaningful under stress.