Managing your debt service coverage ratio (DSCR) as a retail property or shopping center owner is crucial to making sure your facility is profitable. Lenders use the DSCR as a key statistic to assess a borrower’s capacity to repay a loan. This blog post will explain what DSCR is, how to calculate it, and offer some advice on how to manage it.

Describe DSCR

A financial statistic called the debt service coverage ratio (DSCR) gauges a property’s capacity to make its debt obligations. The debt service coverage ratio (DSCR) is computed by dividing the property’s net operating income (NOI) by its mortgage payments. The resulting ratio illustrates how many times the debt service can be paid off with the property’s NOI.

When a property has a debt service coverage ratio of one, it can just about afford its debt payments since its NOI equals its debt service payments. The danger of loan default increases if the property’s DSCR is less than 1.0, which indicates that it is not making enough money to pay off its debt.

How to Determine DSCR

To determine your property’s DSCR, perform the following steps:

Step 1: Determine the net operating income (NOI) for your property
The net operating income (NOI) of your property is the gross income less all operational costs (such as property taxes, insurance, and maintenance fees).

NOI = Gross income – operating expenses

Step 2: Calculate the debt service (mortgage) payments for your property
The principal and interest payments you make each month to recoup your loan are known as debt service (mortgage) payments on your home.

Step 3: Subtract debt service (mortgage) installments from NOI.
Divide your NOI by your debt service payments to determine the DSCR of your property.

DSCR = NOI / Debt service (mortgage) payments

Tips for Managing Your DSCR

Let’s talk about some advice for managing your property’s DSCR now that you know how to calculate it:

1. Increase Rental Income: Increasing your rental revenue is the best strategy to lower your DSCR. If you need to fill vacancies, think about boosting your rent or recruiting new tenants. To draw in new tenants, you might also think about enhancing the property or adding facilities.
2. Reduce Operating Expenses: Cutting your running costs is another strategy to raise your DSCR. Find strategies to reduce expenses without compromising the caliber of your property. You may, for instance, switch to energy-efficient lighting, bargain better prices with your suppliers, or contract out maintenance work to a different company.
3. Refinance Your Loan: Consider refinancing your loan if you find it difficult to keep your DSCR in good shape. You might be able to refinance your loan to get a lower interest rate, cheaper monthly payments, or an extended loan term, allowing you more time to raise your rental income or minimize your running costs.
4. Renegotiate Your Loan Terms: Consider renegotiating your loan terms with your lender if you are unable to refinance your loan. You could request a longer repayment period, a reduced interest rate, or a more accommodating payment plan. If your lender feels that you are serious to repaying your loan, they could be prepared to work with you.
5. Monitor Your DSCR Regularly: Finally, it’s critical to routinely check your DSCR. Every month, check your financial statements to make sure you’re paying your debts on time. If you see that your DSCR is dropping, act right now to solve the problem before it worsens.

For your retail property or shopping center to be successful, it is essential to manage your DSCR. You may keep your finances in good shape and prevent going into default on your loan by raising your rental income, decreasing your running costs, refinancing your loan, renegotiating your loan conditions, and frequently checking your DSCR. Keep in mind that a strong DSCR has advantages for you as the property owner as well as for fostering a relationship of trust with lenders that will make it simpler to obtain funding for future projects.

F2H Capital Group is a debt advisory firm specializing in negotiating the best terms for your commercial real estate projects. The company offers a range of financial products and services, including fixed loans, bridge loans, and construction loans across all asset types. Please contact us for any of your financing needs.