Most purchases of real estate include mortgage debt so that the owner can leverage their position and can pay the debt service from current and future cash flow from the property. At ORBA, we routinely work with our real estate-owning clients in the negotiation of new loans, the refinancing of existing loans and in discussing borrowing needs with their bankers or lenders. With the limitations on the deduction of interest created under the Tax Cuts and Jobs Act of 2017, the level of financing becomes critical in maximizing any tax benefits from the ownership of property.
One of the most common measurement ratios that a banker will use to determine the amount they will lend on a property is the Debt Service Coverage Ratio (DSCR). The DSCR is a ratio, the numerator of which is the net income of the property for a period after adding back the non-cash expenses of depreciation and amortization as well as the interest expense on the mortgage debt, all divided by the mortgage interest and principal of the debt. A property cannot afford to pay its debt if that ratio is less than 1.00. Lenders generally expect a ratio of 1.15 or greater.
If you are considering a purchase or looking to refinance debt on your real estate, contact your ORBA real estate experts to discuss lending issues. We will also be pleased to introduce you to lenders with whom we have worked on other deals.