The Hidden Ratio That Could Affect Your Lease

A debt coverage ratio (DCR) is calculated by dividing a building’s net operating income (NOI) by its debt service. In office buildings, NOI comes from rents minus expenses and taxes. Lenders typically require a DCR of 1.2–1.35. If it drops below that, the landlord is technically in default—even if they’re making payments. This gives lenders significant control: they can sweep cash, restrict leasing or capital spending, demand more reserves, or even foreclose.

In high-vacancy markets like San Francisco, many landlords have fallen below required DCRs despite low loan-to-value (LTV) ratios. For example, a building bought in 2016 at 50% LTV and fully leased at $60/SF NOI was way above the DCR.   However, today the building is only 50% occupied, with falling rents and rising costs—pushing its DCR below 1.0.  This landlord is in default.

What does this mean for tenants? Sometimes, operations remain unaffected. Other times, service and maintenance suffer. But for tenants with upcoming lease expirations, a landlord in default can create leverage—and opportunity.  But don’t expect your landlord to volunteer this information.  Only experienced advisors who know where to look will be able to tell you if your landlord is in distress.  If you’d like to learn more about the circumstances at your building, reach out to us.