Investment & Underwriting
DSCR
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Also called: debt service coverage ratio · debt coverage ratio
DSCR = NOI ÷ annual debt service (principal and interest). A DSCR of 1.25x means the property generates 25% more income than needed to cover its loan payments. Most conventional commercial lenders set a minimum DSCR covenant (commonly 1.20x–1.35x depending on asset class and lender) both at origination and as an ongoing covenant tested annually.
DSCR is the metric that most directly determines maximum loan proceeds on a stabilized asset — lenders size the loan to the lower of a loan-to-value constraint or the DSCR constraint, and on lower cap rate deals or in higher interest rate environments, the DSCR constraint is frequently the binding one, capping leverage below what LTV alone would allow.
Because conventional banks generally will not lend against cannabis-use collateral, DSCR underwriting for Michigan cannabis real estate typically runs through private or cannabis-specific lenders with different (often higher) minimum coverage requirements and shorter amortization schedules, which changes the maximum supportable purchase price for a levered buyer.
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Terms that travel with this one
- Cap RateCapitalization rate — a property's net operating income divided by its purchase price or value, used as the primary shorthand for pricing and comparing income-producing real estate.
- Cash-on-Cash ReturnThe ratio of a property's annual pre-tax cash flow to the actual cash invested (down payment plus closing costs), used to measure leveraged return rather than the unleveraged return a cap rate reflects.
- NOINet Operating Income — a property's total operating revenue minus operating expenses, before debt service, capital expenditures, and income taxes, used as the standard basis for valuing income property.
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