Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

Which of the following best describes DCR?

1. Debt Coverage Rate

2. Debt Capital Ratio

3. Direct Cost Ratio

4. Debt Compliance Requirement

The correct answer is: Debt Coverage Rate

The correct answer, Debt Coverage Rate, refers to a vital financial metric used in real estate and property management to assess a property's ability to generate enough income to cover its debt obligations. The Debt Coverage Rate is calculated by dividing the property's gross operating income by its total debt service (the total amount of money required to service the debt, including both principal and interest payments). A Debt Coverage Rate greater than 1 indicates that the property generates sufficient income to meet its debt obligations, which is a positive sign for lenders and investors. A DCR below 1 suggests that the property does not generate enough income to cover its debt payments, which could signal financial distress or increased risk. The context of the other options highlights that they do not accurately represent DCR. The Debt Capital Ratio is often related to equity financing rather than operating income, the Direct Cost Ratio typically refers to the relationship of direct costs to total costs in various budgeting contexts, and the Debt Compliance Requirement does not convey the measure of income versus debt service illustrated by the Debt Coverage Rate. Thus, the focus and application of the DCR firmly establish its importance in evaluating financial health in property management.