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Debt Coverage Ratio (DCR) article

How is the Debt Coverage Ratio (DCR) calculated for commercial real estate investments and developments? What are the factors that the Debt Coverage Ratio (DCR) takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Debt Coverage Ratio (DCR) useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.

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Video Title: Learn about the Debt Coverage Ratio (DCR)

Video Publication_Date: Thursday, December 29, 2016

Video Duration: 3:42

Video Description:
The topic for this commercial real estate investment analysis video is Debt Coverage Ratio (DCR). Throughout the video planEASe Software is used to illustrate Debt Coverage Ratio (DCR). The video does not use the current Proforma Example, but all the factors that the Debt Coverage Ratio (DCR) are sensitive to are covered.

Total Gross Income$365,472$372,443$370,410$376,040$384,217$414,321
Less: Vacancy & Credit Loss19,0843,20214,6205,0493,50150,321
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 Ratio1.2001.2911.2251.2821.3151.234

In this case the 2010 Debt Coverage Ratio (DCR) was calculated by:

2010 Net Operating Income (NOI)$276,987
divide by total debt service$230,823
equals the 2010 Debt Coverage Ratio (DCR)1.200

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

Why is Debt Coverage Ratio (DCR) useful?

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.

What is the Debt Coverage Ratio (DCR) Sensitive to:

Expenses, Scheduled Income (Rent Increase/Decrease, Vacancy, Reimbursements, Free Rent), Debt Payment (Loan Amount, Loan Interest Rate, Amortization Period).

The Debt Coverage Ratio (DCR) is shown in these planEASe Reports:

Written by
Michael Feakins, CCIM
of planEASe Software