California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A lender is evaluating a commercial property for a loan. The property has an annual Net Operating Income (NOI) of $150,000. The annual debt service (principal and interest payments) for the proposed loan would be $120,000. What is the Debt Coverage Ratio (DCR) for this property?
- A1.25
- B1.50
- C0.75
- D0.80
Show answer & explanationAnswer & explanation
Correct answer: A. 1.25
The Debt Coverage Ratio (DCR) is calculated by dividing the Net Operating Income (NOI) by the annual debt service. So, $150,000 / $120,000 = 1.25.
Why the other options are wrong
- B. This is an incorrect calculation, possibly adding or multiplying instead of dividing.
- C. This is an incorrect calculation, possibly subtracting or dividing by a wrong number.
- D. This is the inverse of the correct DCR, dividing debt service by NOI.
Debt Coverage Ratio (DCR)
A financial ratio that measures a property's ability to cover its annual mortgage payments from its net operating income.
- DCR = Net Operating Income (NOI) / Annual Debt Service
- Lenders typically require a DCR of 1.20 or higher for commercial loans
- A higher DCR indicates lower risk for the lender
Memory trick: NOI Over Debt Service, Keeps Lender's Nerves at Ease.