Commercial Valuation The Golden Ratio DSCR

Understanding how to value commercial properties is always a challenge. Not only the valuation process will be based on the income that a property generates or should be generating, but also on local and regional factors such as employment and the overall economy. Today, one more factor will be of consequence the availability of credit. Income is the primary decision making factor, all of the other ones are secondary even credit(to a certain extent).

Income is important, because a commercial property is an investment. Investments need to generate return that are performing to a minimum level. Every investment type will have a different expected return the more risky the investement the higher the expected return should be. For example buying a stock in coke will have a lower return than buying a strock in technology start up. The same applies to buying and selling Non Owner Occupied and Commercial properties.

The DSCR or Debt Service Coverage Ratio establish the relationship between income and debt on the property. The higher the DSCR the higher is the level of income in relation to the debt that needs to be serviced.

Debt Service Coverage Ratio = Net Operating Income / Debt Service

• Net Operating income = Gross Income - Vacancies - Expenses
• Debt Service = Monthly/Yearly loan payments

DSCR >1 Highly desired in most of the country provide best credit

DSCR = 1 Not as attractive but limited number of financing available

DSCR <>Very limited options