If a property has a debt coverage ratio of 1.1, which statement best describes the ratio?

If a property has a debt coverage ratio of 1.1, which statement best describes the ratio?

• A. The mortgage payments are 1.1 times NOI.
• B. NOI is 1.1% of debt service.
• C. Debt service equals NOI.
• D. The property generates enough income to make the mortgage payment.

Answer: (D)

Debt coverage ratio compares how much income a property generates (NOI) to the debt service required for the loan. A ratio above 1 means there’s enough income to cover the mortgage payments, with some cushion as the ratio increases. Here, a DCR of 1.1 means NOI is 1.1 times the annual debt service, i.e., the property produces 10% more NOI than is needed to make the mortgage payments. So the statement that best describes the ratio is that the property generates enough income to make the mortgage payment (and then some). The other descriptions misstate the relationship between NOI and debt service: they either invert the ratio, imply a much smaller fraction, or claim equality, which would correspond to a DCR of 1.0.

Debt coverage ratio compares how much income a property generates (NOI) to the debt service required for the loan. A ratio above 1 means there’s enough income to cover the mortgage payments, with some cushion as the ratio increases. Here, a DCR of 1.1 means NOI is 1.1 times the annual debt service, i.e., the property produces 10% more NOI than is needed to make the mortgage payments. So the statement that best describes the ratio is that the property generates enough income to make the mortgage payment (and then some). The other descriptions misstate the relationship between NOI and debt service: they either invert the ratio, imply a much smaller fraction, or claim equality, which would correspond to a DCR of 1.0.