Glossary
Interest cover ratio (ICR)
Also called: ICR, interest coverage
Interest cover ratio measures how many times a property's net operating income covers the interest payable on a loan over the same period. It is calculated by dividing net operating income by annual interest and is mostly used for commercial and other income-producing property.
An example
An investor buying a leased warehouse takes the annual rent, subtracts the outgoings the tenant does not reimburse, and divides the result by the interest the loan would cost each year. The answer is expressed as a multiple, such as a number followed by an x.
Why it matters
Commercial lenders set a minimum interest cover in their credit policy. If the ratio falls below it, the lender may offer a smaller loan or none at all, and existing loans often include an interest cover covenant that is tested during the term. A vacancy or rent reduction can push a loan out of compliance.
Points to check
Ask the lender how it defines income and interest for the test, and whether it uses a buffered rate. Check how often a covenant is tested and the consequences of a breach.
Try it: Interest cover calculator