DSCR

Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its mortgage payments from operating income. It is calculated by dividing Net Operating Income by Annual Debt Service. A DSCR of 1.25x means the property generates 25% more income than needed to service its debt-providing a safety cushion for both the borrower and lender.

DSCR is the single most important metric lenders use to size commercial real estate loans. Most conventional lenders require a minimum DSCR of 1.20-1.25x, meaning the maximum loan amount is the point where debt service equals 80-83% of NOI. CMBS lenders may accept slightly lower DSCRs (1.15-1.20x), while conservative lenders and SBA loans may require 1.30x+.

For NNN properties, DSCR calculations benefit from the lease structure's income predictability. Lenders view long-term NNN leases with investment-grade tenants as lower risk, which can support slightly lower DSCR thresholds. However, lenders also stress-test DSCRs by applying higher interest rates to the calculation, ensuring the property can withstand rate increases at refinancing.

DSCR deterioration is a critical risk factor. If NOI declines (tenant vacancy, rent abatement) or debt service increases (rate reset on variable-rate loans, refinancing at higher rates), the DSCR may fall below lender covenants, triggering loan default provisions including cash sweep mechanisms, additional reserve requirements, or acceleration clauses.

DSCR determines how much you can borrow against your NNN property. A higher DSCR means more income cushion but also means you're using less leverage-potentially reducing equity returns. Most NNN investors target a 1.25-1.30x DSCR as a balance between leverage optimization and safety. In the current lending environment, stress-tested DSCRs (calculated at higher assumed rates) have become the binding constraint on loan sizing, often limiting proceeds more than LTV ratios.

Most conventional lenders require 1.20-1.25x DSCR for NNN properties. Credit tenant NNN properties with long lease terms may qualify at 1.15-1.20x. CMBS lenders typically require 1.20-1.30x. SBA loans generally require 1.25x+. The actual requirement depends on tenant credit quality, remaining lease term, and the lender's risk appetite.