What is the formula for debt service coverage ratio (DSCR) and its typical underwriting threshold for a commercial property?

• A. DSCR = annual debt service / NOI; threshold is 0.9 to 1.1
• B. DSCR = NOI / annual debt service; threshold is at least 1.25 to 1.35
• C. DSCR = cash flow / debt service; threshold is 1.0
• D. DSCR = net operating income / debt service; threshold is 2.0

Answer: (B)

Debt service coverage ratio shows how many times a property's income can cover its annual debt payments. The standard formula uses Net Operating Income divided by annual debt service. Net Operating Income represents the property’s income after operating expenses (excluding debt service, taxes, and depreciation). Annual debt service is the total yearly loan payments (principal plus interest). Underwriting usually requires a DSCR of about 1.25 to 1.35, meaning the NOI is 25–35% higher than debt service. This cushion accounts for vacancies, maintenance and capital expenditures, and unexpected declines in income. Other formulations either invert the ratio, use cash flow instead of NOI, or set a much higher threshold, which don’t align with common lending practice.