Debt Coverage Ratio (DCR) article
How is the Debt Coverage Ratio (DCR) calculated for commercial real estate investments and developments? What are the factors that the Debt Coverage Ratio (DCR) takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Debt Coverage Ratio (DCR) useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.
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Video Title: Learn about the Debt Coverage Ratio (DCR)
Video Publication_Date: Monday, April 14, 2025
Video Duration: 3:42
Video Description:
The topic for this commercial real estate investment analysis video is Debt Coverage Ratio (DCR). Throughout the video planEASe Software is used to illustrate Debt Coverage Ratio (DCR). The video does not use the current Proforma Example, but all the factors that the Debt Coverage Ratio (DCR) are sensitive to are covered.
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| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Total Gross Income | $365,472 | $372,443 | $370,410 | $376,040 | $384,217 | $414,321 |
| Less: Vacancy & Credit Loss | 19,084 | 3,202 | 14,620 | 5,049 | 3,501 | 50,321 |
| Effective Income | $346,387 | $369,241 | $355,790 | $370,992 | $380,717 | $364,000 |
| Total Operating Expenses | $69,400 | $71,244 | $73,141 | $75,094 | $77,103 | $79,170 |
| Net Operating Income | $276,987 | $297,997 | $282,649 | $295,898 | $303,614 | $284,830 |
| Total Debt Service | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 |
| Debt Coverage Ratio | 1.200 | 1.291 | 1.225 | 1.282 | 1.315 | 1.234 |
In this case the 2010 Debt Coverage Ratio (DCR) was calculated by: | 2010 Net Operating Income (NOI) | $276,987 |
| divide by total debt service | $230,823 |
| equals the 2010 Debt Coverage Ratio (DCR) | 1.200 |
How is the Lender Yield calculated?
The Rate of Return (IRR or MIRR, depending on the Model being used) on the Total Debt Service for the property or investment. It is computed by reversing the sign of the Debt Service (to look at it from the Lender's perspective, where the draw is an outflow and the debt service and repay are inflows) and computing returns as normal on these reversed cash flows.
Written by
Michael Feakins, CCIM
of planEASe Software