If a property has net operating income of $2.5 million and annual debt service of $2 million, what is the DSCR and what does it imply?

• A. 1.25; indicates cash flow cushion.
• B. 0.80; indicates negative cash flow.
• C. 2.5; indicates heavy leverage.
• D. 1.0; break-even.

Answer: (A)

DSCR shows whether the property’s cash flow (net operating income) is enough to cover annual debt service. It’s calculated as NOI divided by debt service. Here, 2.5 million divided by 2 million equals 1.25. This means the property generates 25% more NOI than the debt service required, a cash flow cushion that lenders typically view as favorable. It doesn’t imply heavy leverage; leverage relates to loan size vs. value, not this ratio. A DSCR below 1 would mean negative cash flow after debt service, a DSCR of 1.0 is break-even, and a DSCR of 2.5 would indicate a much larger cushion than what’s actual here.