Usually, in the real estate world, when the debt service coverage ratio is up, the loan to value ratio is down, and that's considered a good thing. Lately, however, many lenders and borrowers are confronted with mortgage loans that have both high DSCRs and LTVs. The property is cash-flowing but, at least on paper, the owner has little or no equity. Understanding this conundrum is not difficult. Figuring out what it means depends on the circumstances of each situation.

High DSCRs are likely to occur when properties are fully leased and considered stabilized, and if the interest rates are relatively low. It helps, of course, if the LTV is low, because that implies that a reasonable amount of money was borrowed compared to the property's ability to pay debt service.

Despite the doom-and-gloom atmosphere surrounding real estate investments, many properties are, in fact, well-leased and stabilized. Interest rates are at a historically low, borrower friendly level. This is particularly true for floating rate loans tied to indices such as LIBOR, especially if the rates have no floors. In this market, even if debt levels are so high that LTVs approach or exceed 100%, interest rates are so low that they can lead to reasonable or even high DSCRs.