California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A lender is evaluating a commercial property with an annual Net Operating Income (NOI) of $60,000. The property's total annual mortgage debt service (principal and interest) is $50,000. What is the property's Debt Coverage Ratio (DCR)?
- A0.83
- B1.50
- C1.20
- D1.10
Show answer & explanationAnswer & explanation
Correct answer: C. 1.20
Debt Coverage Ratio = NOI ÷ Annual Debt Service = $60,000 ÷ $50,000 = 1.20. A DCR above 1.0 means the property generates enough income to cover its debt payments with a margin of safety.
Why the other options are wrong
- A. This results from inverting the calculation (debt service ÷ NOI).
- B. This overstates the ratio and does not match the math.
- D. This does not match the correct division of the given figures.
Debt Coverage Ratio (DCR)
A ratio lenders use to measure whether a property's income is sufficient to cover its debt payments, calculated as NOI divided by annual debt service.
- DCR = NOI ÷ Annual Debt Service
- DCR above 1.0 indicates positive cash flow after debt payments
- Lenders often require a minimum DCR (e.g., 1.20 or 1.25) for commercial loans
Memory trick: Income Over Debt keeps the Deal alive (DCR = NOI/Debt).