The right debt service coverage ratio
By Caitlin Jones
1 min read
Tax Credit Advisor, April 2011: Which would you rather have: a property with 1.10 debt service coverage, or one with 1.25 coverage?
They’re the same size, in the same city; in fact, across the street from one another. They have the same total development cost ($150,000 per apartment); the same first mortgage terms (8%, 30 years); similar amounts of soft debt; and the same annual operating expenses ($4,800 per apartment). But one has 1.10 coverage; the other has 1.25.
Why are the debt service coverages different? The first was an acquisition/rehab property that was financed using volume-cap tax-exempt bonds and equity from 4% low-income housing tax credits. Rents were set near market ($975 per month), resulting in supportable hard debt of $62,700 per apartment (43% of total development costs). The second, a new construction property, secured 9% tax credits by promising deeper affordability. Rents were set at $655 a month, resulting in hard debt of $24,100 per apartment (16% of TDC).
