What is a good rent cover ratio?

There is no single right level. A reader judges cover against how variable the business's earnings are, how much of its costs are fixed, what the operator must spend to keep the site trading, and how the rent will rise under the lease. A steady business with low upkeep can carry thinner cover than a seasonal one with heavy repairs. The more useful question is how far trade could fall before cover reaches one time, and whether that has happened before.

Is rent cover calculated on EBITDA or EBITDAR?

On earnings before rent, which is EBITDAR when the accounts show rent as an operating cost. Dividing EBITDA, which is already after rent, by the rent would understate the cover by one time. Under IFRS 16, and under the UK's FRS 102 for periods beginning on or after 1 January 2026, most leases no longer produce a rent expense, so reported EBITDA is already before rent, and the cash rent has to be taken from the lease notes or the operator's own management accounts.

Why do care home and hotel landlords report rent cover?

Because their income depends on operators whose trade is tied to the building. Investors in those properties want to know whether each operator can afford its rent, and rent cover is the plain measure of it. A landlord with many such leases often reports cover across its portfolio and site by site, so that investors and lenders can see which tenants are comfortable and which are close to the point where the rent might not be paid.

What is the difference between rent cover and occupancy cost ratio?

Rent cover divides earnings before rent by the rent: how many times the occupier earns what it pays. The occupancy cost ratio divides the total cost of occupying a shop, rent and outgoings together, by the shop's sales. The first is read most often for trading properties with one operator, such as hotels and care homes; the second for shops, where landlords often collect tenants' sales. Both ask whether the rent is sustainable, from earnings and from sales respectively.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Rent Cover: a Worked Example

The landlord's rent is the operator's last line before profit.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

Rent cover tells a landlord, and the bank lending to that landlord, how far the occupier's trade could fall before the rent is at risk. It is the occupier's earnings before rent divided by the rent, read at one site or across all the occupier's sites. On an office or warehouse it is a secondary figure, because the space can be re-let. On a building fitted out for one trade and of little use to anyone else, it is close to being the cover on the landlord's loan, since the rent that services the loan comes out of that trade.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

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PART OF Property Development Finance

// 01 — WHY A LANDLORD'S LENDER READS THE TENANT

A lender to a property investor usually reads the building first and the tenant second: an office or warehouse can be re-let to someone else if the tenant fails. A trading property is different. A pub, a hotel or a care home is fitted out and licensed for one kind of business, and its rent is set by what that business can earn there. If the operator fails, the next operator will pay what the trade supports, which may be far less, and the building may stand empty while one is found.

So the landlord's lender reads the operator's numbers at the site. The question is not whether the operator is a good business overall, but whether this site earns its rent with room to spare, and how much room.

// 02 — HOW RENT COVER IS CALCULATED

Site rent cover = site EBITDAR ÷ site rent

Group rent cover = group EBITDAR ÷ total rent across all sites

EBITDAR = earnings before interest, tax, depreciation,

amortisation and rent

Three choices change the result. The first is which costs sit above the line. A site's own accounts often leave out a share of head-office costs, the area manager and central marketing, so a site can look stronger than it is as part of the group. The second is upkeep. Under a full repairing lease the operator pays for the building's repairs, and earnings before depreciation say nothing about the roof that needs replacing. The third is the accounting. An operator reporting under IFRS 16, or under FRS 102 for UK periods beginning on or after 1 January 2026, shows little or no rent line for most of its leases: the fixed rent has become depreciation and interest on a lease liability, while short-term, low-value and turnover-linked rents still pass through operating costs. EBITDAR then has to be rebuilt from the cash rent in the notes, the same step EBITDAaL takes the other way.

// 03 — THE EXAMPLE

A pub with eight guest rooms, constructed for this page like every figure in it, is owned by an investor and let to an operator of several pubs on a long full repairing lease at US$300,000 a year. The investor asks for a loan of US$3.2m at 7%. The site's accounts show revenue of US$3.4m and EBITDAR of US$780,000. The adjustments and the fall in trade are the example's assumptions, not a market norm.

Reported site rent cover: 780,000 ÷ 300,000 = 2.60×

Share of central costs − 90,000

Repairs under the lease, not in the site accounts − 60,000

Adjusted site EBITDAR = 630,000

Adjusted rent cover: 630,000 ÷ 300,000 = 2.10×

Revenue falls 15%: 3,400,000 × 15% = 510,000

Earnings lost at a 45% contribution margin: 510,000 × 45% = 230,000

Rent cover in the weaker year: (630,000 − 230,000) ÷ 300,000 = 1.33×

Landlord's interest: 3,200,000 × 7% = 224,000

Landlord's interest cover: 300,000 ÷ 224,000 = 1.34×

The landlord's interest cover of 1.34 times is fixed by the lease and looks the same in a good year and a bad one. It is real only while the operator pays. Rent cover is where the risk shows: 2.6 times on the site's own figures, 2.1 once the operator's full costs of running it are counted, and 1.3 if revenue falls 15%. At that point the site makes US$100,000 after rent, a third of the rent, before tax and the operator's own borrowing, and a lender would ask whether the operator would choose to keep it.

// 04 — HOW IT DIFFERS FROM FIXED CHARGE COVER

Both start from earnings before rent, which is why they are confused. Fixed charge cover divides by rent plus the operator's interest and scheduled debt repayments: it asks whether the operator can meet every payment it has no choice about, and it is usually the operator's own lender's test. Rent cover divides by rent alone and is mostly read by the landlord and the landlord's lender. An operator can have comfortable rent cover and thin fixed charge cover if it is heavily borrowed, and the landlord then depends on the operator's bank as much as on its trade.

Site and group cover can also point in different directions. A group covering its total rent 1.8 times may hold this site at 2.1 and others at barely one. When an operator with many sites gets into difficulty, whoever takes charge of it tends to keep the sites that earn their rent and give back the ones that do not. Strong site cover is part of the landlord's protection even if the group fails.

DEFINED IN ONE PARAGRAPH → · LEASE-ADJUSTED LEVERAGE, WORKED → · FIXED CHARGE COVER →

// 05 — WHERE IT DECIDES A FILE

On a trading property, rent cover often decides how much weight the lender gives the lease. Strong site cover over several years supports lending on the rent as if it were secure; thin cover moves the lender towards the building's value with the operator gone, which for a trading property is often a valuation on what a new operator could afford to pay. The lender may ask the landlord for the operator's site accounts every year, and for the right to see them under the lease if the landlord does not already have it.

It also bears on rent reviews. A lease with fixed or index-linked increases raises the rent every year whatever the trade does, so cover can fall while the business stands still. The lender reads the review clause beside the cover, because the rent that pays its interest today is the same rent that may be pushing the operator towards leaving.

EBITDAR → · OCCUPANCY COST RATIO, WORKED → · DEBT SERVICE COVERAGE RATIO →

// QUESTIONS PEOPLE ASK

What is a good rent cover ratio?: There is no single right level. A reader judges cover against how variable the business's earnings are, how much of its costs are fixed, what the operator must spend to keep the site trading, and how the rent will rise under the lease. A steady business with low upkeep can carry thinner cover than a seasonal one with heavy repairs. The more useful question is how far trade could fall before cover reaches one time, and whether that has happened before.
Is rent cover calculated on EBITDA or EBITDAR?: On earnings before rent, which is EBITDAR when the accounts show rent as an operating cost. Dividing EBITDA, which is already after rent, by the rent would understate the cover by one time. Under IFRS 16, and under the UK's FRS 102 for periods beginning on or after 1 January 2026, most leases no longer produce a rent expense, so reported EBITDA is already before rent, and the cash rent has to be taken from the lease notes or the operator's own management accounts.
Why do care home and hotel landlords report rent cover?: Because their income depends on operators whose trade is tied to the building. Investors in those properties want to know whether each operator can afford its rent, and rent cover is the plain measure of it. A landlord with many such leases often reports cover across its portfolio and site by site, so that investors and lenders can see which tenants are comfortable and which are close to the point where the rent might not be paid.
What is the difference between rent cover and occupancy cost ratio?: Rent cover divides earnings before rent by the rent: how many times the occupier earns what it pays. The occupancy cost ratio divides the total cost of occupying a shop, rent and outgoings together, by the shop's sales. The first is read most often for trading properties with one operator, such as hotels and care homes; the second for shops, where landlords often collect tenants' sales. Both ask whether the rent is sustainable, from earnings and from sales respectively.

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THE NUMBER · THE ECONOMY · COLLATERAL MARKETS

A bank lent 65% of the value of a factory valued at US$10m. If it has to sell, it expects a forced-sale discount of 30%, and selling costs of 5% of the sale price.

What does it recover against the US$6.5m loan?

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THE READING ROOMIN ONE PARAGRAPHRent cover What is rent cover, and why do landlords and their lenders read it?