LIHTC DSCR and Debt Sizing: A Worked Example

Start with the cash flow the lender will accept

Assume a project has $600,000 of annual underwritten NOI and the model uses a 1.20x minimum DSCR. Maximum annual debt service under that constraint is:

$600,000 ÷ 1.20 = $500,000

At that payment level, the model has $100,000 of NOI remaining after the illustrated debt service. That amount is not automatically distributable cash: other obligations, reserves, and restrictions may still apply.

Before using the calculation, reconcile the model’s NOI with the lender’s definition. Confirm the treatment of replacement reserves, management fees, vacancy, rental assistance, and subordinate debt payments. Two models can display the same DSCR while using different cash-flow assumptions.

Convert the payment into a loan amount

An annual payment is not a principal balance. Converting it into debt capacity requires an interest rate, amortization period, payment frequency, and repayment structure.

For a fully amortizing loan with monthly payments, assume a 6.00% nominal annual rate and 30-year amortization. The monthly payment limit is $500,000 ÷ 12. Using a monthly rate of 0.06 ÷ 12 over 360 payments produces a loan balance of approximately $6.95 million.

The formula is:

Loan amount = monthly payment × [1 − (1 + monthly rate)^(−number of payments)] ÷ monthly rate

Use the actual term sheet’s conventions in a transaction. The interest rate in this example is an input chosen for illustration, not a statement about current market pricing.

See how three assumptions change capacity

The following cases hold the 30-year amortization and monthly payment convention constant. Each row changes the indicated input from the base case.

The lower-NOI case reduces debt capacity by about $348,000. If every other source and use remains unchanged, that reduction increases the financing gap by the same amount.

The higher-rate case illustrates another distinction: the project can support the same payment while supporting less principal. A model that updates interest expense without resizing permanent debt can miss that effect.

Check the other limits before calling the loan sized

Coverage is one constraint. A lender may also apply loan-to-value, loan-to-cost, debt-yield, program limits, or other requirements. Fees and withheld amounts may reduce net proceeds below the face amount of the loan.

Keep the results of each applicable constraint visible. The final loan amount must satisfy the complete set of requirements, rather than the most favorable calculation. Also separate construction borrowing from the permanent loan: they can have different sizing tests, repayment sources, and funding schedules.

Link rent assumptions to debt assumptions

Small operating changes can have a meaningful financing effect. In a rent-restricted property, test both the revenue assumptions and the operating costs that sit above NOI.

Keep the rent-limit source, utility allowance, unit mix, vacancy assumption, and expense basis available to the reviewer. For the state-specific operating-model discussion, see the rent and operating pro forma guide. Select the relevant state before applying its guidance.

Make the result useful to the development team

Report the base loan amount alongside its governing constraint and the assumptions most likely to move it. Include the resulting financing gap, not just the DSCR ratio.

A helpful review question is: “If this assumption changes, which source fills the difference?” That question turns a calculation into an acquisition or financing decision.

Explore EZFeasi Site Feasibility or book a demo to walk through how operating assumptions and debt sizing fit into the broader model.