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Debt Service Coverage
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The debt service coverage ratio calculates the amount of cash available to meet debt obligations. The debt service coverage ratio is used in both corporate and real estate finance. Excluding tax considerations, in corporate finance the debt service coverage ratio is [Net Income + Depreciation/Amortization + Interest Expense]/[Interest Expense + Principal Payments]. For real estate loans, the debt service coverage ratio is Projected Net Operating Income (ie, rents less operating expenses)/Debt Service (principal plus interest). When making income property loans, a debt service coverage ratio of 1 is the minimum required to ensure the property generates sufficient income to cover the debt. Indeed, most lenders will require some cushion and demand a debt service coverage ratio of 1.25 or better.
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