DSCR before price: how a lender reads your building

A lender is not buying your building. A lender is asking one question: does the net operating income cover the payment, with room. That question has a number, and the number is the debt service coverage ratio.

The arithmetic

Divide net operating income by annual debt service. At 1.00 the building exactly pays its loan and nothing else. Most lenders on small commercial and multifamily want 1.20 to 1.25, which means the income has to exceed the payment by a fifth or a quarter before the loan is written at all.

Why it binds before the cap rate does

The payment is set by the loan constant — the rate and the amortisation together — not by the rate alone. When the loan constant sits above the going-in cap rate, every additional dollar of debt makes coverage worse, and leverage stops helping. You can have a 6% building and still not get a 65% loan.

Work it backwards

Take the net operating income, divide by your required coverage, and divide again by the loan constant. That is the largest loan the building supports. Add the equity you actually have, and you have the highest price the building can be bought at with that debt — before anyone has discussed what it is worth. On a lot of files this number, not the comparables, is the offer.

What it changes about negotiation

A seller who is told “the market does not support it” hears an opinion. A seller who is shown the coverage arithmetic, the constant, and the loan the building supports is being shown the same constraint every buyer will hit. It does not always change the price. It usually changes the conversation.

Our underwriting desk runs this on any building you type into it, and every file on this site publishes its coverage next to its yield for the same reason.