Two ratios dominate commercial real estate credit analysis: the loan-to-value ratio (LTV) and the debt service coverage ratio (DSCR). Together, they form the primary framework through which lenders evaluate risk and size loans on income-producing properties.
LTV measures the outstanding loan balance as a percentage of the property's appraised or market value. A 65% LTV means the lender has financed 65 cents of every dollar of property value, with the borrower's 35 cents of equity providing a loss buffer. LTV is a measure of collateral protection — the percentage decline in value the lender can absorb before their position goes underwater. Conservative LTVs vary by property type: multifamily and industrial may support 70–75% LTV, while hospitality and speculative development typically require 50–60% or lower.
DSCR — also called the debt service coverage ratio — measures a property's net operating income (NOI) relative to its annual debt obligations. NOI is calculated as gross revenue minus operating expenses (excluding debt service and depreciation). If a property generates $1.25 million of NOI and annual debt service is $1.0 million, the DSCR is 1.25x. Most lenders require a minimum DSCR of 1.20x–1.30x at underwriting, with some lenders setting minimum floors of 1.10x or 1.15x for lower-risk property types.
The two ratios serve different analytical purposes. DSCR measures income adequacy — can this property generate enough cash to service the debt? LTV measures collateral coverage — if the property had to be sold, would the proceeds repay the loan? A property can have an adequate DSCR but a stressed LTV (if values have declined), or vice versa. Lenders use both as parallel constraints in loan sizing.
It is important to recognize that both ratios are sensitive to the assumptions used in their calculation. Cap rate assumptions, occupancy projections, expense load, and interest rate (for DSCR) all affect the output. Stress-testing these inputs across plausible downside scenarios is essential to rigorous CRE underwriting.