Seeing language from a lender that uses the following as a basis for their quarterly DSCR covenant.
Property NOI + Interest Expense + Depreciation + Amortization / Total Debt Service Related to Property
Wouldn't this formula inflate the numerator and make it much easier for borrower to hit the 1.25x hurdle? Why wouldn't it simply be NOI/Debt Service?
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I read it as the opposite, it’s deflating the numerator. I work for a lender and we never include interest/depreciation/amortization expenses in our DSCR calculation. Unless they’re including those expenses in the original NOI calculation and just adding them back, which would make sense
Well, is the formula add the expense meaning negative or add the absolute value of the expense to the NOI?
I had assumed the latter as the OP said the numerator was being inflated
Depends what the definition of each item is. If Property NOI is net of those things by definition, then adding them back makes sense.
Looks a lot more like a Fixed Charge Coverage ratio definition vs. a traditional DSCR calculation. Seems like they are crossing ideas. Lot of recourse lenders analyze FCCR & have covenants to minimum FCCR for a Sponsor's REO.
If the deal isn't closed, I'd push to have the definition simplified.
I think OP means NI (Net Income) + Dep + Amort + Interest, not NOI.
Read the loan agreement definitions and see what is included in NOI.
I work in PE buyouts but this looks the same as our DSCR.
The lender just wants to make sure the property’s cash flows are sufficient to meet its debt obligations.
Since D&A are non cash, & therefore don’t impact the proper’s ability to service it’s debt, it’s an add back. A lot of times a lender will also approve other non-recurring/extraordinary expenses that are above & beyond the standard interest, amort, depr addbacks.
I've never seen any sort of DSCR calc include depreciation.
One thing I will say - If this happens to be floating and you are buying an interest rate cap. Get CRYSTAL clear on the treatment of that interest rate cap income.
We have some office deals that are performing super well but are in sweep because they are essentially ignoring the fact the cap exists. It's very annoying and there isn't a whole bunch to be done about it but plead your case. This also isn't a referencing one lender, it's ~4 of them and basically, the answer is it is what it is.
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