A property has a debt coverage ratio of less than 1.0. Which statement is accurate?

A property has a debt coverage ratio of less than 1.0. Which statement is accurate?

• A. Income fully covers debt service
• B. Net operating income equals debt service
• C. Debt service exceeds NOI
• D. Income does not cover debt service

Answer: (C)

Debt coverage ratio compares net operating income to debt service. If this ratio is below 1.0, the operating income isn’t enough to cover the loan payments, so debt service exceeds NOI. In practical terms, the property’s cash flow after operating expenses cannot meet annual debt obligations, signaling higher default risk for lenders and often prompting a need to increase NOI or reduce debt service. The other ideas either imply equality or use a broader term like income rather than NOI, which isn’t the precise measure used here.

Debt coverage ratio compares net operating income to debt service. If this ratio is below 1.0, the operating income isn’t enough to cover the loan payments, so debt service exceeds NOI. In practical terms, the property’s cash flow after operating expenses cannot meet annual debt obligations, signaling higher default risk for lenders and often prompting a need to increase NOI or reduce debt service. The other ideas either imply equality or use a broader term like income rather than NOI, which isn’t the precise measure used here.