The debt service coverage ratio (DSCR) measures a company’s ability to pay its debt obligations. It is determined by dividing a property’s annual net operating income (NOI) by its annual debt payments. The DSCR as reported by CommercialEdge is determined by dividing a property’s estimated annual operating income by its estimated annual debt payments.
The estimated annual property income of a building is determined in 4 steps:
- A building’s occupied square footage is multiplied by the rental rate — expressed in dollar amount per square foot — of the building’s occupied square footage.
- The operating expenses for the full footprint of the building (both leased and unleased square footage) are subtracted, using operating expense estimates provided by Yardi Market Insight.
- The resulting figure is then divided by the building’s full square footage to determine its operating income rate per square foot.
- The estimated annual property income of the building is then determined by multiplying the building’s operating income rate by the building’s leased square footage.
Yardi Market Insight determines the operating expense of a building using anonymized competitive sets comprising at least five properties with a similar property classification located within a three-mile radius of the subject building.
To maintain the privacy of an individual property’s operating expense data, if the initial competitive set does not include at least five similar properties, the competitive set is expanded to include all property classes, not just close matches.
Notably, competitive sets may sometimes include properties that are not truly similar to the subject property, most often in low-density areas where true comparable buildings are rare. In such cases, property operating expenses and annual income may be over- or understated.
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