One of the most frequent reasons a commercial loan is denied is because the property does not meet the commercial lender's minimum DSCR requirements. Understanding how a commercial mortgage lender calculates the DSCR can be helpful to know when applying for a commercial loan.

DSCR = NOI/Total Debt Service

A common misconception made by borrowers when apply for a commercial mortgage loan is that the bank or commercial lender only uses the expenses from the property when calculating the NOI.  Commercial Lenders use the actual expenses plus additional holdbacks, such as, off-site management, vacancy, replacement reserves, repairs and maintenance, etc. Commercial lenders add these numbers to the expenses for several reasons, including, should the borrower default - management fee holdback, should the property lose a tenant(s) -vacancy factor, increase in costs, buffer for unexpected repairs, etc.

Calculating the Debt Service Coverage Ratio - DSCR -

Here is a basic example of how a commercial mortgage lender calculates the DSCR for a commercial loan request. The lender holdbacks are highlighted in blue, remember these are not actual expenses, but they are deducted from the property's gross income.