Why the shocks hit cash, not revenue minus expenses
Revenue minus operating expenses is not cash available for debt service. Taxes, replacement reserves, owner compensation and distributions sit between them. So the tool starts from the cash figure you have already underwritten and subtracts only the change each shock causes. A $2.9 million revenue line falling 10% removes about $291,000 of cash, regardless of how the rest of the statement is built.
This is a screening tool, not underwriting. A feasibility study tests these variables from market evidence, through ramp-up, at the actual loan terms. For rate risk, read the interest-rate stress testing guide.
About the DSCR stress test
How does the stress test calculate downside cash flow?
Each shock is applied to your original cash available for debt service. A 10% revenue decline reduces cash available by 10% of revenue; a 10% expense increase reduces it by 10% of expenses. The tool never substitutes revenue minus expenses for cash available, because cash available already reflects items such as taxes, reserves and distributions.
What is break-even cash flow?
The cash available for debt service needed for exactly 1.00x coverage, which equals annual debt service. The tool also shows how far revenue or expenses alone could move before coverage reaches 1.00x.
What DSCR does a lender require?
It is set by each lender's credit policy and program. Many conventional policies use 1.20x to 1.25x or higher; see the DSCR requirements comparison in the resource center.
Coverage thin under stress?
An independent study tells committee whether the assumptions behind that coverage hold.
Analytical continuity
After the Investment: Independent Performance Monitoring
Carry the financing case into ongoing loan and portfolio review.
The analytical relationship does not have to end when the feasibility study is delivered. Wert-Berater can continue monitoring the asset against the original underwriting assumptions, updating market conditions, testing coverage, identifying performance variances and maintaining a recurring analytical record.
-
Individual Asset Monitoring
- Revenue
- Expenses
- NOI
- DSCR
- Occupancy
- Market rents
- Competitive supply
- Value
- Original underwriting assumptions
-
Watchlist Monitoring
Most relevant here- DSCR deterioration
- NOI deterioration
- Occupancy
- Revenue
- Expenses
- Market conditions
- Collateral / value
- Stabilization
- Refinancing risk
-
Construction Monitoring
- Progress
- Budget
- Cost-to-complete
- Schedule
- Change orders
- Draws
- Remaining costs
- Lease-up
- Stabilization
-
Portfolio Monitoring
- Portfolio performance
- Risk
- Concentration
- Market exposure
- Annual review
- Re-underwriting
- Watchlist
- Portfolio-level trends