A commercial real estate investor is seeking to acquire a multi-residential building in Montreal for $5,000,000. After considering rental income, operating expenses, and a proposed mortgage payment, the effective gross income (EGI) is $350,000/year, and operating expenses (excluding mortgage principal and interest) are $100,000/year. The proposed annual principal and interest payment is $210,000. Many commercial lenders require a minimum DSCR of 1.30. What is the DSCR for this property, and what does it indicate?

Question: A commercial real estate investor is seeking to acquire a multi-residential building in Montreal for $5,000,000. After considering rental income, operating expenses, and a proposed mortgage payment, the effective gross income (EGI) is $350,000/year, and operating expenses (excluding mortgage principal and interest) are $100,000/year. The proposed annual principal and interest payment is $210,000. Many commercial lenders require a minimum DSCR of 1.30. What is the DSCR for this property, and what does it indicate?

Answer options: ✅ DSCR = 1.19; This property does not meet the lender's minimum DSCR requirement.

• DSCR = 1.35; This property meets the lender's minimum DSCR requirement.
• DSCR = 1.67; This property exceeds the lender's minimum DSCR requirement.
• DSCR = 0.95; This property would result in a cash flow deficit.

Correct answer: DSCR = 1.19; This property does not meet the lender's minimum DSCR requirement.

Explanation: The Debt Service Coverage Ratio (DSCR) is calculated as (EGI - Operating Expenses) / Annual Debt Service. Here, ($350,000 - $100,000) / $210,000 = $250,000 / $210,000 ≈ 1.19. This is below the required 1.30, indicating a DSCR shortfall.