Debt Coverage Ratio This is the ratio of annual debt service to annual net operating income. In other words how much income must be used for debt service. The City as a Lender wants to be sure there is a cushion of income left over after debt service and other operating expenses have been paid. Generally, if the project appears sound, the debt service coverage ratio would be between 1.1 and 1.3. The City Reviewer determines whether the debt service coverage ratio is at least 1.1 in years 3 10 and/or if there are – sufficient operating reserves during the lease-up phase. Also the Reviewer will examine the project to see if there are sufficient replacement reserves for the term of the HOME affordability period or the loan term, which ever is longer. Please provide a Table similar to the one below. Table 3: Template for Debt Coverage Ratio (DCR) Amount for Debt Coverage Item Amount/Rate Calculation Gross Rent $80,000 $80,000 Vacancy Rate 6.00% $4,800 Effective Gross Income $75,200 Expenses $20,000 $20,000 Net Operating Income (NOI) $55,200 Annual Debt Payments $46,000 Debt Coverage Ratio (DCR) 1.20 Loan-to-Value Ratio (LTV) The Loan-to-Value Ratio (LTV) should fall between 75 to 85 percent. LTV is an indication of how much mortgage debt is placed on the property relative to its value. The typical range is between 75 80% of the value. A high LTV – property’s fair market may indicate that there is too much debt on the property relative to its value. In this instance if some of the higher interest debt is replaced with HOME funds this problem could be mitigated. Table 4: Template for Loan to Value Ratio (LTV) Amount for LTV Loan Amount Calculation 1st Mortgage Loan $529,000 2nd Mortgage Loan $250,000 3rd Mortgage Loan $0 Total Mortgage Loans $779,000 Owner Equity $125,000
Debt Coverage Ratio This is the ratio of annual debt service to annual net operating income. In other words how much income must be used for debt service. The City as a Lender wants to be sure there is a cushion of income left over after debt service and other operating expenses have been paid. Generally, if the project appears sound, the debt service coverage ratio would be between 1.1 and 1.3. The City Reviewer determines whether the debt service coverage ratio is at least 1.1 in years 3 – 10 and/or if there are sufficient operating reserves during the lease-up phase. Also the Reviewer will examine the project to see if there are sufficient replacement reserves for the term of the HOME affordability period or the loan term, which ever is longer. Please provide a Table similar to the one below. Table 3: Template for Debt Coverage Ratio (DCR) Item Amount/Rate Amount for Debt Coverage Calculation Gross Rent $80,000 $80,000 Vacancy Rate 6.00% $4,800 Effective Gross Income $75,200 Expenses $20,000 $20,000 Net Operating Income (NOI) $55,200 Annual Debt Payments $46,000 Debt Coverage Ratio (DCR) 1.20 Loan-to-Value Ratio (LTV) The Loan-to-Value Ratio (LTV) should fall between 75 to 85 percent. LTV is an indication of how much mortgage debt is placed on the property relative to its value. The typical range is between 75 – 80% of the property’s fair market value. A high LTV may indicate that there is too much debt on the property relative to its value. In this instance if some of the higher interest debt is replaced with HOME funds this problem could be mitigated. Table 4: Template for Loan to Value Ratio (LTV) Loan Amount Amount for LTV Calculation 1st Mortgage Loan $529,000 2nd Mortgage Loan $250,000 3rd Mortgage Loan $0 Total Mortgage Loans $779,000 Owner Equity $125,000
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