DSCR: the debt service coverage ratio, and how CMBS lenders use it

The DSCR formula

DSCR = underwritten net cash flow ÷ annual debt service

Both halves have precise meanings in a CMBS deal. The BANK5 2025-5YR14 prospectus defines underwritten net cash flow as underwritten net operating income "less all reserves for capital expenditures, including tenant improvement costs and leasing commissions." Net operating income is rental and other property revenue less operating expenses, insurance, real estate taxes and any ground rent. Debt service is the year's scheduled principal and interest. Because CMBS lenders use net cash flow rather than NOI, a CMBS DSCR is lower than the same loan measured on NOI.

The prospectus also fixes how interest-only loans are counted: for a loan that is interest-only for its whole term, annual debt service is the sum of the first 12 interest payments; for a partial interest-only loan, it is based on the first principal and interest payment. For a loan split into pari passu notes across several trusts, the ratio uses the debt service on all the senior notes together but excludes subordinate notes (BANK5 2025-5YR14 prospectus, "Description of the Mortgage Pool", definitions).

A worked example, at today's median CMBS rate

Take a $20,000,000 loan on a property with $1,900,000 of underwritten net cash flow, at 6.40%, the median note rate on fixed-rate CMBS loans of the last 12 months (from the loan file behind CMBS loan rates; a reference figure, not a quote). Interest is computed on a 30/360 basis for simplicity.

Same property, same loan, same rate: amortization alone moves the ratio from 1.48x to 1.27x. For a full-term interest-only loan there is a shortcut: DSCR equals the net cash flow debt yield divided by the interest rate. Here, 9.5% ÷ 6.40% = 1.48x. That matters because interest-only is the norm in CMBS now: 87% of the loans in the 12-month sample were interest-only for their entire term.

DSCR on recent CMBS loans, by property type

Underwritten DSCR at securitization, from each loan's SEC asset-level filing (Form ABS-EE), for loans originated between October 19, 2025 and October 19, 2026. Whole loans only: a pari passu note that is one piece of a larger split loan is left out, so the ratio is not double counted. Bars show the middle half of loans (25th to 75th percentile) with the median marked.

Multifamily 1.33x

Mobile home park 1.39x

Mixed use 1.42x

Industrial 1.49x

Self-storage 1.57x

Retail 1.61x

Hotel 1.77x

Office 1.84x

Co-op loans stand apart (median 6.93x): housing cooperative loans are underwritten as if the building were a rental, at very low leverage, so coverage is far above any other type.

Leaving co-ops aside, multifamily loans carried the lowest median coverage (1.33x) and office loans the highest (1.84x). Lenders accept thinner margins on steadier income and ask for more cushion where income can fall fast; for the borrower, a high required DSCR shows up as a smaller loan, not a better one. More detail: CMBS by property type and CMBS statistics.

How DSCR sizes a CMBS loan

A CMBS lender sizes a loan to the most restrictive of several tests: a maximum loan-to-value, a minimum DSCR, and a minimum debt yield. Each lender sets its own levels by property type, market and the bond market's appetite at the time; none is fixed by law. DSCR binds when rates are high, because the same cash flow covers less interest. Debt yield ignores the rate, so it binds when rates are low. The full sizing walk-through is on CMBS underwriting, and the CMBS loan calculator runs all three tests on your numbers.

One regulatory benchmark is published. Under the federal risk retention rule, a "qualifying" commercial real estate loan needs a DSCR of at least 1.25 for multifamily, 1.5 for a qualifying leased property, and 1.7 for other commercial property, on both two years of actual performance and two years of projections (17 CFR 246.17(a)(2)(vi)-(vii)). Few conduit loans meet the full standard, which also requires amortization and a term of at least ten years; see CMBS risk retention.

Subordinate debt changes the ratio

A loan's DSCR depends on which debt you count. In BANK5 2025-5YR14, the Spiral loan (a Manhattan office tower whose senior notes are spread across several trusts) showed 1.99x on the senior notes alone and 1.39x on the whole loan including its subordinate B-notes, as reported in the prospectus's whole loan summary. The shortcut above checks out on it: the loan is interest-only for its 60-month term, its senior-note net cash flow debt yield is 11.1% and its rate is about 5.50%, and 11.1% ÷ 5.50% is about 2.02x; the small gap to 1.99x is interest accruing on an actual/360 basis. Mezzanine debt works the same way. When you compare offers, ask whether the coverage figure is on the senior loan, the whole loan, or total debt including any supplemental financing.

DSCR after closing

The ratio keeps mattering for the life of the loan. Many CMBS loan agreements set a DSCR or debt yield test that, if failed, triggers cash management, sweeping excess cash into a lender-controlled account. Servicers report each loan's most recent DSCR to bondholders and use it to place loans on the watchlist. The thresholds are set in your loan agreement, not by a standard rule, so read yours. If coverage is sliding toward a default, the special servicing guide explains what happens next.

Sources: BANK5 2025-5YR14 prospectus (424B2, filed 2025-04-02), definitions of Underwritten Net Cash Flow, Underwritten NOI and Debt Service Coverage Ratio, and the whole loan summary; 17 CFR 246.17 (eCFR); SEC Form ABS-EE asset-level filings via cmbs.news. Methodology: how the medians are computed.