Buildings: CapEx in Debt Service Coverage Ratio

[Nick M.]

Hi guys,

Lenders have strict DSCR requirements. For instance coming in at a rate of 1.3 per year. I bring this up because during the initial years of building ownership, to improve long term cashflow a building owner may decide to make capital expenditures. For instance replace water heater, furnace, replace roof etc. Given the costly nature of investments or expenses such as this, in theory your DSCR could take a hit. If for instance you need to come in at 1.3, you could come in at 1.1 or 1.0 or worse - .9, .8.

My question ultimately is, do these capex investments count towards DSCR?

Thanks! 

[Greg Dickerson]

@Nick M. actual CAPx is not an operating expense its a balance sheet item so it's not factored into NOI calculations so it does not affect the DSCR.

CAPx reserves which is the moneys allocated to CAPx monthly do affect NOI and is an operating cost and there is a factor in overall calculations of DSCR