Debt Service Coverage

Debt Service Coverage

Debt Service Coverage

While several factors are considered in commercial loan underwriting, debt service coverage is primary among them and indicates a borrower’s capacity to service a requested loan. This tool calculates debt service and illustrates how debt service coverage ratios are impacted by changing income and capital assumptions.

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EBITDARM represents earnings before interest, taxes (income), depreciation, amortization, rent and management fees. This represents net operating income before “provision for management fees” and after property expenses associated with real estate taxes and insurance.

Provision for management costs

Lenders typically require a provision for management costs of not less than 5% of revenue. The resulting EBITDAR represents operating cash flow available for debt service (or rent as applicable), before provision for capital expenditures.

Provision for capital expenditures

Lenders typically require a provision for capital expenditures to fund capital needs associated with continuing operations.

Debt service coverage (DSC)

The debt service coverage is determined by dividing the total annual income available to pay debt service by the annual debt service requirement. Lenders and investors typically seek DSC ratios of not less than 1.25.

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