Securing financing is often the single greatest hurdle in commercial real estate transactions. As a Fargo Commercial Realtor, I have seen strong deals rejected not because of property fundamentals but because of the way debt is structured. Banks underwrite the global Debt Service Coverage Ratio (DSCR), which measures a property’s net operating income against the combined annual debt service of both the bank loan and any seller financing. Even when a property cash flows well, the wrong loan terms can sink an approval. By contrast, the right financing structure can transform a marginal deal into one that sails through underwriting.
In Fargo Commercial Real Estate, this is not theoretical. I recently guided a client through a financing challenge where we strategically adjusted the debt mix to meet a bank’s DSCR requirements without changing the property’s income. This real-world case study shows how a small shift in financing terms can make the difference between a declined loan and a green light from the lender.
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Case Study: Seller Mortgage Restructuring for Bank Approval
A Fargo client sought to purchase a commercial property for $2,000,000. The bank was willing to provide a $1,200,000 loan at 6.5 percent interest, amortized over 25 years. That translated to an annual bank payment of about $97,230.
The challenge came with the remaining financing. If the bank also carried an additional $300,000 note on those same terms, the extra payment would have been about $24,307, bringing total annual debt service to $121,537. At that level, the deal risked rejection because the DSCR was too tight.
Instead, I negotiated with the seller to carry the $300,000 balance as a mortgage at 5 percent interest only. This dropped the annual seller payment to just $15,000. Together with the bank loan, the blended annual debt service was about $112,230.
That single adjustment reduced debt service by more than $9,300 annually, without lowering the purchase price. This simple restructuring gave the lender a stronger DSCR while keeping the client’s equity intact.
The lesson is clear: numbers alone do not determine approval. Structure is everything in Fargo Commercial Real Estate financing.
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Visualizing the DSCR Impact With Seller Financing
| Financing Structure | Annual Bank Payment | Annual Seller Payment | Total Debt Service | Resulting DSCR* |
|---|---|---|---|---|
| Bank terms for entire debt | $121,537 | $0 | $121,537 | 1.23 |
| Seller interest only for partial debt | $97,230 | $15,000 | $112,230 | 1.34 |
*Assumes property NOI of $150,000, amortization of 25 years on bank debt, bank rate 6.5 percent, seller rate 5 percent interest only.
This comparison highlights why creative structuring matters. The property’s NOI did not change, yet shifting a portion of the debt to a seller note improved the DSCR from 1.23 to 1.34. Lenders pay attention to this ratio. A stronger DSCR increases the likelihood of approval and provides the buyer with healthier cash flow.
Contrarian Insight For Fargo Investors
Most investors assume the only path to bank approval is higher equity or a lower purchase price. While those factors help, they are not always necessary. A smarter and often overlooked approach is negotiating seller financing terms that improve DSCR. By lowering the denominator in the ratio, investors can unlock approvals without sacrificing returns. This strategy gives Fargo buyers a competitive edge in competitive deal environments.
Lessons For Fargo Commercial Real Estate Buyers
- Financing structure can be as critical as purchase price in determining approval.
- Seller financing with interest-only terms can strengthen DSCR and improve bank underwriting outcomes.
- Experienced negotiation with sellers and lenders is essential to creating win-win financing structures.
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With over 25 years of commercial real estate experience, I help clients uncover the numbers that truly matter. Whether buying, selling, leasing, or structuring deals, I deliver lender-ready packages that give clients clarity and confidence.
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Frequently Asked Questions About Fargo Commercial Real Estate
What is DSCR in commercial real estate financing?
Debt Service Coverage Ratio (DSCR) measures a property’s net operating income compared to its annual debt obligations. Lenders in Fargo typically look for a DSCR above 1.25 to ensure cash flow can comfortably cover debt payments.
Why does seller financing help deals get approved?
Seller financing can offer flexible terms such as interest-only payments. This lowers annual debt service, improves DSCR, and makes the deal more appealing to banks without requiring the buyer to increase equity.
Can DSCR be improved without changing NOI?
Yes. By restructuring debt with better terms, such as lowering interest rates or extending amortization, investors can improve DSCR even when property income remains the same.
About Brian Tulibaski, Fargo Commercial Realtor
Brian Tulibaski | Fargo Commercial Realtor
Horizon Real Estate Group | Fargo, ND
📞 701.793.0653
✉️ brian@horizonfargo.com
🌐 www.FargoCommercialRealtor.com
Brian Tulibaski brings over 25 years of commercial real estate experience, guiding clients through buying, selling, leasing, and investing in Fargo Commercial Real Estate. His background spans multifamily, retail, industrial, farmland, and development, giving him the knowledge to evaluate opportunities and structure strategies that deliver lasting results. His corporate leadership experience further equips him to analyze complex deals with clarity and precision.
Brian and his wife, Kate, live in West Fargo with their five children. He is active in the community as the founder of Fargo Networking Group and a Sunday School teacher at Hope Lutheran Church. In his free time, Brian enjoys NDSU Bison games, coaching youth sports, and time with family at their lake home in Nevis, Minnesota.
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