What does the Debt Service Coverage Ratio (DSCR) measure in CRE underwriting?

• A. It measures loan-to-value ratio.
• B. It measures equity contribution.
• C. It measures interest rate adequacy.
• D. It measures NOI divided by debt service, indicating cash flow cushion.

Answer: (D)

DSCR measures whether a property's ongoing cash flow is enough to cover its loan payments. It compares net operating income (NOI)—income remaining after operating expenses, before financing costs—to the debt service (annual principal and interest payments). The ratio is NOI divided by debt service. A DSCR above 1 means there’s a cash flow cushion that helps ensure debt can be paid even if some income dips, while a DSCR below 1 signals the cash flow wouldn’t fully cover debt service.

This metric is distinct from loan-to-value, which looks at loan size relative to property value; equity contribution, which is the down payment; and interest rate adequacy, which concerns the cost of borrowing rather than the ability to cover debt payments.