From Les Sparks:

I believe what we are discussing here is Item no. 6 under the Operator’s Regulatory Agreement wherein the a debt service coverage ration of less than 1.0 is considered a Project Operating Deficiency. However, there is no definition anywhere in the Handbook for this calculation specifically at the Operator. In fact, this requirement is not in the new Handbook either, so it is difficult to understand what HUD really wants here.

In a nutshell, HUD is really looking to see if the operator can really support the required debt service of the Borrower. So, this conversation could be simplified by just asking the question, “Is the lease payment equal to or greater the required debt service of the borrower?”

As for the rest of the question on how to calculate this we have to refer to the old 4232.1 Handbook which stated:

B. Debt Service Coverage
1. The ability for a project to cover all debt obligations is one of the strongest indicators of financial health. This indicator is required to meet specific thresholds during the Section 232 application review process, and that threshold is to be held to similar expectations during the life of the Section 232 project. Although other components will also shape the overall financial strength of a project, the Debt Service Coverage Ratio (DSCR) should have the heaviest weight of the financial analysis. The formula to be used when calculating the DSCR is below. It requires the Servicer’s use of both Operator and Borrower financial information. Please note that Net Operating Income (NOI) listed below does not include the following in the expenses (that are subtracted from income for the calculation of NOI): rent/lease expense, depreciation expense, amortization expense, or Mortgage Insurance Premium (MIP).