Ownership & finance

Debt service coverage ratio

Also written: DSCR

What Debt service coverage ratio means

Debt Service Coverage Ratio measures a property's ability to cover its annual mortgage principal and interest payments using its Net Operating Income. It evaluates financial risk for lenders and investors, indicating the cushion available before cash flow fails to cover debt obligations.

Formula

DSCR = Net Operating Income / Total Debt Service

How it is used

Lenders mandate a minimum DSCR—typically between 1.20x and 1.40x—before approving hotel acquisition or refinancing loans. Operators use the ratio to evaluate how sensitive debt obligations are to drops in RevPAR or unexpected cost increases. A ratio below 1.0x indicates negative cash flow where property income cannot cover debt, triggering default covenants. Revenue managers and asset managers track DSCR to determine how much operational cash flow can be safely reinvested in capital expenditures versus held for debt compliance.

Worked example

A boutique hotel generates $1,500,000 in Net Operating Income (NOI) annually. Its annual debt service, combined principal and interest, equals $1,200,000. The calculation is $1,500,000 / $1,200,000, resulting in a DSCR of 1.25x. This meets a typical lender requirement of 1.20x.

Common mistake

Confusing Net Operating Income with net cash flow after capital reserve deductions can artificially inflate the calculated DSCR, misleading lenders during underwriting.