What factors impact your Debt Coverage Ratio(DCR) ?
What are some of the metrics that you can change in your Deals to get a better DCR ? 

There are some logical things like LTV, Interest rates and Amortization Period. Anything else you guys know of, that helps in getting my DCR up ? 

I was analyzing a deal, and I also noticed that increasing the NOI didn't have an impact on the DCR, because when I increased the NOI, it also increased my Lender assessed value, which is based on a fixed cap rate for an area. And since Lender Assessed value increases, with an increase in NOI, therefore the mortgage payment increases too, and hence the impact of NOI on the DCR is next to none.
[{"id": "gcu10ss", "text": "You could just set a fixed loan amount that isn\u2019t driven by an LTV ratio. Reverse your calculation so the LTV is calculated by a fixed LA rather than the other way around.", "replies": [{"id": "gcu4qd3", "text": "But don't banks lend on an LTV ratio of the appraised value that they come up with from their underwriting at a fixed cap rate for the area ? (this is for apartment buildings).  \n\nIf I was to make the loan amount independent of the LTV ratio, wouldn't I be doing my analysis on a wrong loan amount ?", "replies": [{"id": "gcu5jws", "text": "I\u2019m in a Canadian market and they lend on all metrics. It\u2019s not a simple LTV calculation. Whenever we have a deal that has this issue the loan amount will get dropped to meet the minimum DCR requirements. It\u2019s just as, if not more important then the leverage in my experience. Perhaps this isn\u2019t the case in other markets (U.S.) but I would be surprised if that were the case. In Canada at least lenders really don\u2019t want to foreclose they feel more comfortable knowing the property\u2019s cash flow can support the mortgage payments. This is why they look at tenants and leases so closely. It\u2019s not very intuitive as this is obviously very different than consumer lending. \n\nI can\u2019t tell you how many clients have been surprised by the loan amounts lenders quote them because of this very issue in their internal analysis. The cash flow is just as important as the leverage.\n\nIt\u2019s also worth noting every lender will look at it slightly differently. More often they\u2019re lending on an appraised value rather than a simple direct cap estimate. Appraisals will typically combine a DSCF and direct cap analysis to arrive at a value. And the cap rate selected is based more on comps than area. Again this is all just experience from Canadian market.", "replies": [{"id": "gcualjw", "text": "This is pretty similar to what I see too. Banks don't want to foreclose in any market because they aren't in the business of owning real estate. They don't want to deal with it. Unless a deal is underwater with zero hope of coming around, a bank will usually work with the borrower so that some kind of payments keep flowing.", "replies": [], "depth": 4}, {"id": "gcyzuh0", "text": "Sorry for the late reply. Was in a surgery yesterday so couldn't think straight. \nAnyways, I am in Canada as well :) \nI am looking to get into Multi, and was analyzing a deal. \nAfter talking to lenders I learnt that they underwrite deals on a cap rates, and for each area this is derived from Comparable sales and their underwriting criteria. From what I understood, this does become a simple direct cap estimate at the end. It might not be a fixed number but could vary by 25 bps on either side. \n\nSo here is the problem I ran into: https://i.imgur.com/g9NJnyy.png\n(basically I tried varying the NOI to see its impact on DCR. Rest of the parameters were assumed to be the same). \n\nI ran the numbers. I came up with a lower than anticipated DCR. Now I know I can vary certain things - This includes my LTV or Amortization terms(period or interest rate).  I assumed that the NOI would play a role too, but if I use the simple direct cap of 4.5, it doesn't really help at all because my Lender value also varies by the same ratio along with it, and hence my DCR doesn't change on varying the NOI. \n\nNow I am trying to figure out what can I play with to get that DCR up. Thoughts ? \n\nThis connection breaks only if the deal purchase price is under the valuation that lenders come up with. \n\nAlso what did you mean by DSCF here ? \nThank you.", "replies": [{"id": "gcz2utn", "text": "RE: the final value and DSCF, that was a typo. I meant DCF. It\u2019s a discounted cash flow analysis. This will likely be used by the appraiser to balance the direct cap value estimate you just outlined. Don\u2019t worry about it too much at this point. For your purposes it seems like a direct cap analysis will suit your needs for now. \n\nBut my earlier point still stands. You\u2019re not going to get 75% because the property\u2019s cash flow can\u2019t support it. That\u2019s why it\u2019s not changing. You have to set a fixed loan amount at a lower LTV until you can satisfy the DSCR requirement. A lower loan amount will lead to a lower debt service cost.\n\nYou could try increasing the cap rate too. Lenders aren\u2019t going to look at this a rigidly as you\u2019re expecting them too.", "replies": [{"id": "gcz5udi", "text": "Thanks. I will look DCF up. \n\nI understand that I won't get 75% LTV, and will have to go lower than 65%. At 65 LTV, I get a DCR of 1.22, which is close to Conventional Lenders requirement of around 1.2-1.25. \n\nBut what I was trying to say was that I am only able vary the Down payment i.e LTV to get a decent DCR. Is there anything else I can do to satisfy the DCR requirements, other than going a different route for financing ? \n\nAnd as for the Cap rate, I believe that gets my Down payment up as well. In other words, it has the same exact effect as the LTV i.e LTV going from 75 to 65, increases my down payment requirement by about 200k, and increases DCR by 0.1. Whereas increasing the cap rate by 0.5, also increases my Down payment requirement by 200k, while also increasing my DCR by 0.1.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gcu6mtk", "text": "But to answer your question more specifically. No, it wouldn\u2019t be incorrect to fix the loan amount.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gcu14zz", "text": "Your mortgage payment doesn\u2019t have to increase. Okay cool valuation goes up, but your debt doesn\u2019t have to go up. Break the connection.", "replies": [{"id": "gd7r085", "text": "In Canada, Bank's underwriting appraise properties on a Cap rate which is determined by comps and other risk factors. Most of the times this is a range of 50 bps, so something like 3.75-4.25. \n\nSo when my NOI goes up, then so does their estimated value of the property, and they will be willing to lend more to me in that case. This means my financing payments will go up, and I have noticed the financing payment goes up in same ratio as my NOI, so the DCR remains unchanged when the NOI goes up. \n\nSo I don't see why the debt doesn't have to go up, and how can there be no connection. Thoughts ?", "replies": [{"id": "gdb4jaf", "text": "Jesus fucking Christ man...\u201dWilling to lend\u201d you don\u2019t have to take the fucking money. If they say magic book you\u2019re property is now worth more so we\u2019ll lend you more, you can say \u201cthanks but no thanks.\u201d And then the bank goes \u201cyay our LTV is lower\u201d and they jump up and down. The end.", "replies": [{"id": "gdbtd10", "text": "That will also mean the end of me getting a loan too.\n\nEDIT:  I am not even sure if we are talking about the same thing now.  \nWith my Deal - The numbers don't meet the DCR requirements of the Lender unless I reduce the LTV down to a low amount. And increase the NOI in the deal on day 0, doesn't help either as it has no impact on the DCR.\nSo yes, its about how much they are willing to lend today. Yes, they are conservative. So yes, they will only lend me whatever I can get at a DCR of 1.25(and max LTV of 75%). There is no jumping up &amp; down.", "replies": [{"id": "gdbvn1l", "text": "No, it doesn\u2019t. The point he is making is that LTV is a maximum loan amount constraint. It isn\u2019t they will only lend to you at x% LTV. I would be extremely weary of someone that only will give you a loan if you take the most money. Lenders are conservative by nature and would prefer to give you less money. And your interest rate (or quoted spread over a base rate, specifically) will be lower to compensate for a lower risk of default due to more equity in the deal, higher debt service coverage, a better debt held, etc. Hence the prior comment about the lender \u201cjumping up and down.\u201d", "replies": [{"id": "gdbz1a6", "text": "Edited my post above. LTV is only to see how leveraged I am. As long as I am below 75%, banks don't care much about it. But they do care how much my DCR is. If the DCR is too low, then they will decrease the loan amount, which means decreasing LTV till the point where my DCR reaches the 1.25 minimum requirement that they have. This is how I typically believe they analyze Loans that they give out on Commercial Properties. \n\nMy query was how does one break the connection between the NOI and the DCR ?\n\nDCR = NOI/Financing Payment. \n\nIf NOI goes up, then Lender valuation goes up and he will be willing to lend to me a higher amount. But this also increases my mortgage payments to him, because of which the denominator of the DCR formula above also increases, hence nullifying the effect of increase in NOI. How do I break this connection ?", "replies": [{"id": "gdc0f7z", "text": "You\u2019ve gotta be a troll. There\u2019s literally no other reason that could explain you not getting this concept", "replies": [{"id": "gdc0txc", "text": "Yes Yes. Now explain it to me, because I feel so dumb about it.", "replies": [{"id": "gdcmfj6", "text": "Okay so if you\u2019re in excel do a drop in loan amount. Instead of taking 30M, the max based on your appraised value. You take 27. Are you an new analyst, a student, or someone that wants a loan?", "replies": [{"id": "gdcxx6h", "text": "I dropped my LTV from 75 to 65%, that dropped my loan amount, and increased my DCR. And ofcourse it also increased my Down payment. \n\nBut my concern was how do I pass the advantage of increasing my NOI to my DCR ?", "replies": [{"id": "gdd1l5j", "text": "You shouldn\u2019t be buying property", "replies": [{"id": "gdd5v3u", "text": "lol ok, thanks i guess.\nI asked because I am new to commercial Financing, and you answer like I have been doing this for all my life.", "replies": [{"id": "gdin0p8", "text": "No. Respectfully, what he/she is saying and I am agreeing with, is that if you don\u2019t understand this concept in theory, then there are a whole lot more complicated issues you will face down the road and not be prepared for. Trying to save you your money in this deal. You are not ready. Continue to learn, then invest. How are you prepared to determine the amount you are willing to pay for a property without understanding these concepts?  How do you know this investment is a better value on your limited resources than another asset?  You were previously stating that the bank would tell you the value of the asset based on market comps. How did you determine what you were willing to pay?\n\nAnd to go back to another question you had.  You need to disconnect your definition of NOI and what\u2019s left over after debt service. Net operating income is the income the property generates. Then there is a income remaining after debt service and capital expenditures. No one is valuing you on that number. It is NOI before financing costs. You have to make those separate analysis components of your cash flow model and they tell you different things.", "replies": [{"id": "gdit4hy", "text": "First of all, Thank you so much for the reply. I would like to point out that this post as an example is me learning the theoretical part of commercial financing. I don\u2019t have a deal that I am closing on anytime soon, but I am analyzing them to\u00a0familiarize myself with the numbers, and see how the whole thing works or is underwritten. The question in the post is to address one of the things I have run into. Its not a deal I am buying. And commercial, specially apartment buildings are usually over a million dollars, and I am not going to be hasty about acquiring something.\n\n&gt;You were previously stating that the bank would tell you the value of the asset based on market comps. How did you determine what you were willing to pay?\n\nThis is purely based on my personal Goals. For me, the ROI component of the deal over a period of 5 years is important, and non-negative cashflow in the first year. Assuming the remaining\nParameters like Income, expenses, downpayment, Closing Costs &amp; Renovation Budget have been accurately judged &amp; accounted for in my analyzer, I can then figure out what is the max I can pay based on the ROI I can get at different prices. There are ofcourse other variable factors too. \n\n&gt; You need to disconnect your definition of NOI and what\u2019s left over after debt service. Net operating income is the income the property generates. Then there is a income remaining after debt service and capital expenditures. No one is valuing you on that number. \n\nYes, I understand the concept of NOI, and that it doesn\u2019t account the debt service payments(&amp; other Capex). And then there is also a net income which is calculated by subtracting debt payments - essentially the Cash Flow. Now of course this should be positive enough so as to make DCR over 1.25, which is the Lenders requirement. \n\n&gt;No one is valuing you on that number. \n\nBut they are. \"that number\" is the cashflow. It tells the lender if my building is generating enough income or not to cover the debt servicing. And which is why Lenders have a minimum DCR requirement of 1.25(in my area).", "replies": [{"id": "gditmm6", "text": "DSCR at 1.25x is NOI/Debt Service. Not Net Income as you described it. The lender cares how much operating income is there before the debt service. Enough to make payments with some margin (hence the .25 portion of the equation). They don\u2019t actually care how much money you make after the debt, but that it\u2019s there. Your comment about it being iterative though with loan amount is inaccurate If you use NOI.  That is a constant figure and the different loan sizes will change the DSCR as a smaller loan will have a constant numerator and a smaller denominator.", "replies": [{"id": "gdivcfd", "text": "Yup, DSCR is NOI/Debt Service. I just meant there that if Net income is negative, then it means a lower than 1 DSCR, and vice-versa. \n\n&gt;Your comment about it being iterative though with loan amount is inaccurate If you use NOI.\n\nAssuming we are using NOI. How is it not iterative ? \nMaybe its because how buildings are valued differently in the US, but in Canada, the Lender Value of the building, does depend on the NOI. \nAnd this relationship is determined by the Lender cap rate(which like I have said before is dependent on their underwriting, comps and some other factors). So NOI does change the Lender value of the building. And if the Lender value changes, it also changes the debt servicing payment, which in turn changed my DCR. \n\nSo I am unable to see how you are claiming that my NOI doesn't trickle all the way through to debt servicing. \n\n&gt;That is a constant figure and the different loan sizes will change the DSCR as a smaller loan will have a constant numerator and a smaller denominator.\n\nYou are absolutely right. If we assume NOI to be constant, and we change the loan amount, which I assume you mean would be done by changing the LTV percentage, then our DSCR will change accordingly(due to constant numerator and a changing denominator).\n\n....\n\nSo just coming back to my original question -  Assuming a constant LTV, and a constant Lender cap rate(that is used for their valuation), changing the NOI has no effect on the DSCR. Correct or not ? \n\nBecause changing NOI means, Lender valuation changes because their valuation is based on their fixed cap rate for the area. So assuming a fixed LTV, this lender valuation increases the Loan amount if NOI goes up. And hence in the DSCR formula Numerator(i.e income) increases, but the denominator also increases because Loan amount has gone up(and hence debt servicing payments go up), so essentially the changes in Numerator and denominator cancel out, hence not changing the DSCR.", "replies": [], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gcu3g5w", "text": "NOI = Operating income less operating expenses\n\nDSCR = NOI / Debt Service", "replies": [], "depth": 1}, {"id": "gcua41a", "text": "This is interesting. A lot of good responses below. I typically take the same approach as you when beginning my evaluation. I tie my debt amount to a dcr calculation. That way, changes in noi are reflected in the debt load. However, as we get closer to close, we usually will lock into the lesser of either the LTV or DSCR. Of course, if you break that connection between debt and dcr, you will open up a gap in financing as you change inputs.", "replies": [], "depth": 1}, {"id": "gd5i44f", "text": "20 year lender and investor here. Banks (in the US) typically lend on the lower of a percentage of the appraised value or the purchase price. 9.5 out of 10 times the appraised value is the exact purchase price or greater. Maybe in Canada they will lend beyond a certain percentage of the pp (if it appraises higher) but that sounds like horrible lending fundamentals IMO.", "replies": [], "depth": 1}]