Debt Service Coverage Ratio (DSCR)

DSCR is one of the first numbers a commercial lender calculates. It divides net operating income by total annual debt service (principal plus interest). A DSCR of 1.0 means income exactly covers the loan payment with nothing to spare; lenders typically require 1.20 to 1.35, meaning the property must generate 20–35% more income than the debt payment. For an owner-occupied medical building, lenders often consider both the rent the practice pays and the strength of the practice itself, since the tenant and the borrower are effectively the same entity. A low DSCR can force a larger down payment (lowering LTV), a longer amortization period to reduce payments, or a declined loan. Because DSCR depends on NOI, anything that inflates expenses or overstates rent will distort it — which is why lenders scrutinize the underwriting closely.

DSCR determines whether a practice can obtain financing at all, and on what terms. Understanding it before making an offer helps a buyer structure a deal a lender will actually approve.

A medical building produces $150,000 in net operating income and carries annual debt payments of $115,000. Its DSCR is 1.30 — comfortably above most lenders' 1.25 threshold, signaling the income safely covers the loan.