DSCR and Straight-Line Rent

[Jack Macioce]

When calculating DSCR, we know that the formula is NOI / Debt Service. My question focuses on NOI, specifically rent. In DSCR calculations, has anyone ever "straight-lined" revenue?

Projecting revenue is easy.  For example, a building has one tenant that pays $100,000 for the first five years.  In year 5, rent bumps up to $200,000.  In years 1 - 4, our gross revenue would be $100,000 for each year and in year 5 -10, our gross revenue would be $200,000 a year. 

Utilizing the example above, let's assume we are looking refi in year 3 and the lender is requiring a 1.2x DSCR. Let's further assume that our DSCR is 1.18x. We have a problem.

What are our solutions?  Assuming there is nothing we can do with expenses, can we adjust revenue?  Utilizing the example above, our gross revenue in year 3 is $100,000 because the tenant's lease dictates that their rent is $100,000.  Basically our revenue matches our cash inflow.  However, what if we were to "straight-line" our rent? 

Total rent Years 1 - 4 = $500,000

Total rent Years 5 - 10 = $1,000,000

Total Rent = 1,500,000

Spread Total Rent over the life of the lease (10 year) and it's $150,000 per year.

If we straight-line our rent, then our DSCR jumps up to 1.2x. Problem solved.

Straight-line adjustments are required if your financials statements are audited, as GAAP requires it. However, will lenders allow this "adjustment" in calculating DSCR?

I understand that the credit agreement, loan doc, etc. will have defined terms that would most likely answer this question, but for now, let's ignore any comments about reviewing the loan docs.

Has anyone ever tried this approach?  Lenders - do you see a problem with this approach?