Debt Service Coverage Ratio

2 Replies

I understand the DSCR is calculated by diving net operating income by the debt service amount. The questions is that my lender wants to use the tax return of the owning entity to come up with this net income amount. They say that they will add up the depreciation and the interest amounts back to the income but this restricts me in fully expensing any capital expenses and forces me the account for them as assets and depreciate.

I am also thinking about the asset management fees which are usually below the net operating income and I believe the lender should not be using this asset management fees against us when calculating the DSCR. Am I correct here? Any ideas on how to tackle this situation?

You will not get around this. The lender wants to know the true actual calculations and will not bend. They will also add CapX reserves to the operating expense side as well as they look at that as a monthly expense to keep the property in good condition.

@Karan Arora They can and should be including property management expenses. In fact, if you were self managing, they should take your numbers and add in property management expenses.

The reasoning is that the bank has to be concerned about what happens if they have to take the property back. They will have to hire and pay a property manager.

If the property cash flow does not work without normal expenses being included, is this really a good investment?