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: Sunday, May 4, 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 |
Considers: -
Price, Original Loan Amount, Scheduled Income (Current Year Only), Debt Payment (Current Year Only), Vacancies (Current Year Only), Expenses (Current Year Only), Sale Proceeds Increase (Current Year Only)
Ignores:Why is Accounting Rate of Return useful?
Accounting Rate of Return is not commonly used in commercial real estate analysis. It is a
Return on Investment (ROI) type ratio where the cash flow is divided by an investment. The ratio is basically just like the
Cash on Cash ratio with the one year's rise of sale value and decrease in loan principal added to the cash flow side of the ratio. This ratio can, therefore, increase the understanding of the
Cash on Cash ratio.
What is the Accounting Rate of Return Sensitive to:
Scheduled Income
(Current Year Only), Debt Payment
(Current Year Only), Vacancies
(Current Year Only), Expenses
(Current Year Only), Sale Proceeds Increase
(Current Year Only)The Accounting Rate of Return is shown in these planEASe Reports:
Written by
Michael Feakins, CCIM
of planEASe Software