Commercial construction lenders - over 500 of them - await your application for a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 400 banks and 100 hard money construction lenders simply click here.

Debt service is just a fancy term for your mortgage payments.  We are just talking about principal and interest here, not taxes, insurance, or other impounds.  Just remember debt service means your annual mortgage payments.

The net operating income of the property is just the income left over after operating expenses - like taxes, insurance, repairs, and management - and after setting a little aside every year to cover vacancy losses, collection losses, and replacements, like replacing roof or heater.

So will the net operating income property be able to cover the payments?  Will the property just barely be able to cover the payments or will there be plenty of net operating income left over?

To compute the debt service coverage ratio simply divide the annual net operating income by the annual debt service (mortgage payments). 

If the answer is less than 1.0, you are in big trouble.  The property doesn't generate enough income to make the payments.  Yikes! 

If the debt service coverage ratio is 1.0, you are at break even cash flow.  That's not enough for most lenders.  Most lenders want a cushion.  The net operating income has to be sizably larger than the proposed debt service.

Most commercial construction lenders will require a debt service coverage ratio of at least 1.25, based on the appraiser's estimate of future rents and expenses.

Fortunately, most proposed properties cash flow very well these days because of record low interest rates.  Normally you will run into a loan-to-value ceiling before the debt service coverage ratio requirement becomes a problem.

Commercial construction lenders - over 500 of them - await your application for a multifamily or apartment construction loan, a commercial construction loan, a condo or residential subdivision construction loan, or a land development loan. To apply to 400 banks and 100 hard money construction lenders simply click here.

George Blackburne, III is a real estate attorney, the founder of Blackburne & Brown Mortgage Company, Inc., and the sponsor of the C-Loans.com Commercial Mortgage Lender Database.

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