Every property generates income and has expenses. Those two categories are fact regardless of property type. The amount and percentages will vary depending on whether the property is Apartment or Commercial, Net Leases or Gross Leases, etc. In analyzing
commercial property, you need to know the income which will be collected after accounting for vacancy or any additional income from tenant reimbursements. You also need to know the specific line items for expenses. Once you have those two figures, you take the collected income and deduct the expenses to arrive at the Net Operating Income (NOI). For our purposes in discussing Debt Coverage, NOI is the critical number we need.
Debt coverage in its simplest form is the ration between the NOI (the numerator) divided by the Annual Mortgage Payment (the denominator). If that ratio is positive, then the property has positive cash flow. Negative and the property has negative cash flow. No lender will offer financing so high that the property does not have positive cash flow! In most cases, lenders require the annual mortgage payment be covered by at least 20% which equates to a Debt Coverage Ratio (DCR) of 1.20 or higher. However, that minimum varies from lender to lender and property type to property type.
In the end, the concept may seem complicated, but in fact is pretty simple. Doing a quick analysis of any property once you are used to the variables takes only a few minutes. As always, we would be happy to help you look at that calculation for any property under consideration.
