Financial
What is Debt Service Coverage Ratio (DSCR)?
A financial ratio that measures a property's ability to cover its debt payments, calculated by dividing NOI by annual debt service.
Understanding Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is a critical metric used by lenders to assess a borrower's ability to repay a loan. It's calculated by dividing the property's Net Operating Income (NOI) by its annual debt service (principal and interest payments).
Lenders typically require a DSCR of 1.25 to 1.5 or higher, meaning the property's income must be 25-50% higher than its debt payments. This provides a safety margin in case of income fluctuations.
For outdoor hospitality properties, DSCR is particularly important due to seasonal income variations. Lenders want assurance that the property can service debt even during slower periods.
Sage Outdoor Advisory includes DSCR analysis in our feasibility studies, helping clients understand loan requirements and optimize financing structures.
Lenders typically require a DSCR of 1.25 to 1.5 or higher, meaning the property's income must be 25-50% higher than its debt payments. This provides a safety margin in case of income fluctuations.
For outdoor hospitality properties, DSCR is particularly important due to seasonal income variations. Lenders want assurance that the property can service debt even during slower periods.
Sage Outdoor Advisory includes DSCR analysis in our feasibility studies, helping clients understand loan requirements and optimize financing structures.
Examples of Debt Service Coverage Ratio (DSCR)
- •A glamping resort generates $500K annual revenue with $200K operating expenses, resulting in $300K NOI. The property has annual debt service (principal + interest) of $200K. DSCR = $300K ÷ $200K = 1.5. This means the property generates 50% more income than required for debt payments, providing a safety cushion. Most lenders require at least 1.25-1.5 DSCR, so this property meets financing requirements and shows strong ability to service debt even with seasonal fluctuations.
- •An RV park with $850K NOI applies for a $5M loan with $420K annual debt service. DSCR = $850K ÷ $420K = 2.02. This strong 2.0+ DSCR position means the property could still cover debt payments even if income dropped by 50%, making it very attractive to lenders who may offer better interest rates or terms due to lower perceived risk.
- •A campground seeking refinancing: Current NOI is $280K, but debt service on a new $2.2M loan would be $240K annually. DSCR = $280K ÷ $240K = 1.17, which is below the lender's 1.25 minimum requirement. The borrower must either increase NOI (raise rates, improve occupancy), reduce loan amount, or accept less favorable terms. This demonstrates why DSCR analysis is critical before applying for financing.
Common Use Cases
- •Loan applications
- •Financing analysis
- •Feasibility studies
Related Services
Frequently Asked Questions About Debt Service Coverage Ratio (DSCR)
What DSCR do lenders require?
Most lenders require a minimum DSCR of 1.25 to 1.5, meaning income must be 25-50% higher than debt payments.
How is DSCR calculated?
DSCR = Net Operating Income ÷ Annual Debt Service (principal + interest payments).
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