Structure Your Commercial Real Estate Note So You Can Sell It Later

Overview

By Robert Duplicki      May 31, 2026

Some of the same tools and analytical methods that banks use to make lending decisions can be used for seller financing commercial real estate. Of course seller financing offers more flexibility in the deal structuring process. If as the property seller you may sell the note in the future, structuring the deal with investor expectations in mind can make a significant difference in the price you receive for the note.

Maximizing the value of the promissory note for a future sale, needs to be balanced with the needs of the buyer and seller in order to sell the property. This partly depends on the motivation level of the seller along with current market conditions and future expectations.

A Simple CRE Underwriting Approach

Banks rely on structured underwriting analysis when evaluating loans. Private lenders and note buyers may not use the same formal process, but the same core principles apply.

A simplified underwriting worksheet might include the following elements:

Borrower Information

• Borrower financial statement
• Credit history
• Liquidity available for reserves
• Experience managing similar properties

Property Information

• Property type
• Location and regional market conditions
• Occupancy rate
• Current and projected rental income
• Operating expenses

Key Financial Metrics

• Loan amount
• Loan-to-Value (LTV)
• Net Operating Income (NOI)
• Debt Service Coverage Ratio (DSCR)
• Amortization schedule
• Interest rate and payment structure

These metrics allow lenders and investors to determine whether a loan structure is likely to perform over time.

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Key Metrics Used In CRE Lending

Although commercial loans vary widely, most lenders rely on a few core calculations as part of their analysis.

1. Loan-to-Value Ratio (LTV) - The ratio between a mortgage loan and the value of the property pledged as security, usually expressed as a percentage. LTV measures the relationship between the loan amount and the property value. In a construction or renovation (bridge) loan, the loan commitment is the typical numerator.

   • Formula: Loan Amount ÷ Appraised Property Value x 100% = LTV
   • Example:

     For an $800,000 loan on a $1,000,000 property the LTV is 80%

   Banks typically follow supervisory guidance established by the Office of the Comptroller of the Currency and other federal regulators when establishing LTV limits. Here is a table showing the Supervisory Loan-to-Value Limits

   When seller financing is structured within similar limits, it may improve the marketability of the note.

2. Net Operating Income (NOI) - The income generated after deducting operating expenses but before deducting taxes and financing expenses.

   Gross operating income includes rent and other revenue streams, while operating expenses include maintenance, management fees, utilities, and insurance. Operating expenses do not include mortgage payments(debt service), capital expenditures(CAPEX), or income taxes.

   • Formula:

     Gross Operating Income - Operating Expenses = NOI

   • Example:
     • Rental Income: $150,000
     • Other Income: $10,000
     • Operating Expenses:$60,000

       NOI = ($150,000+$10,000) - $60,000 = $100,000

   Investors when evaluating a promissory note for purchase can use NOI to help with investment decision making, property valuation, underwriting and cash flow analysis.

3. Debt Service Coverage Ratio (DSCR) - The ratio of the net operating income divided by the annual debt service requirement. Lenders use this ratio as a risk measure. DSCR measures whether property income can support the loan payments. Many loans include covenants (loan rules) that require borrowers to meet annual debt coverage measures.

   • Formula: DSCR = NOI ÷ Annual Debt Service
   • Example: NOI: $100,000 ÷ Annual Debt Service: $75,000 = 1.33 DSCR

   Many commercial lenders prefer DSCR levels of 1.20 to 1.35 or higher which can vary by property type.

   Higher DSCR values generally indicate lower risk.

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Private vs. Bank Underwriting Comparison

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Buyer And Seller Concerns

The buying and selling of commercial real estate in the small business category can be relationship driven, documentation light, and often constrained by financing friction.

That creates very specific pain points for both buyers and sellers, many of which can be solved (or at least improved) through seller financing and note structuring with an eventual sale in mind.

When property sellers create a real estate note, they often focus primarily on completing the transaction. However, if the note may eventually be sold to a note buyer, the structure of the loan can significantly affect its value. This improved structure tends to also come together from better underwriting.

CRE sellers can experience these concerns:

• A limited buyer pool due to bank constraints. Small CRE deals often fall outside bank sweet spots because the loan size is too small, the property type is too niche (mixed-use, special purpose) along with inconsistent income documentation.
• Pricing versus terms tradeoff. Sellers often face lower cash offers or full price offers with financing risk.
• Uncertainty about note value. Many property sellers don’t realize that the note they created is an asset that can be sold, but its value depends on structure (LTV, DSCR, proper documentation...)
• Desire for income versus liquidity. Sellers often want monthly income and/or a lump sum.
• Lack of an understanding of the tax implications of receiving the full purchase price at closing.

CRE buyers can experience these concerns:

• Inability to qualify for bank financing. Common issues include self-employed income, short operating history and credit imperfections. Banks guided by frameworks from the Office of the Comptroller of the Currency require strict underwriting.
• A slow and uncertain closing process contributed to by more stringent bank appraisals, loan committees and last minute delays or loan denials.
• Buyers may have some down payment funds, but not enough for bank required equity.
• Property condition issues. Banks avoid properties with deferred maintenance, vacancies or unstable income.
• Buyers often need flexible terms. They may want interest-only periods, time to reposition the property, or a custom amortization schedule.

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Ideas To Structure Commercial Real Estate Notes That Make Them More Sellable

Whatever ideas you get at NoteSolutions.us for seller financing, the answer that works for you might need just one adjustment!

Let's start with keeping your options open. Much advice you might get is generic. Even if the advice is more specific to your needs, viewpoints will vary. But it's common that there will be some negotiation between buyer and seller. It is also common that the structure of a real estate note that get's a property sold, may not be the note structure that maximizes the value of your note if you sell it.

One solution to get the best of both worlds is to give yourself some time to improve the value of your note before you sell it.. To sell a note you should get at least a 10% down payment. More is better. What happens if based on all other criteria, you feel good about selling your property to a particular buyer who can only make a small down payment? Try a tiered down payment.

For example, accept 5% down at purchase. Write the sales contract to require additional down payment money one year after purchase. Use an attorney to get the contract written properly. If you decide to sell the note, wait until after the second payment of the down payment. Of course you don't have to wait to get a quote to sell your note or part of it. Your circumstances and other note characteristics may lead to selling sooner.

Payment history is important. I'm referring to the timeliness and completness of payments that will be made by the purchaser of the property. Of course this will be important to you as the property seller. It could also make the difference whether you will be able to sell the note, and to minimze the discount when you sell the note.

An excellent payment history will make it less likely that you will end up taking the property back in foreclosure. Reading about the tiered down payment concept above, you might think that a good payment history will make up for a low down payment. You really need both and note buyers will expect both. Skin in the game has remained an important factor through the years.

If you are a highly motivated seller you might need to take greater risks to sell your property. Seller financing still gives you options that banks won't allow. Under these circumstances the price you get for eventually selling your note will be less of an issue. And a lower grade note may still be sellable.

To improve the quality of your real estte note for yourself and to make it more sellable one key step is reviewing the credit history of the property buyer. As a creditor, your rights under the Fair Credit Reporting Act (FCRA) are important to get comfortable with. For more on this topic Have You Checked Their Credit? will help.

It seems like property sellers and business sellers who provide seller financing are reluctant to check credit histories. Sellers often think that they know enough about the buyer without checking the credit history. If your banker knows you really well, how much due diligence will the banker skip when you apply for a loan?

A buyer of your promissory note who knows what they're doing will require an authorization form to be signed to run a credit report. So if you are attempting to sell your note you should be prepared for this step. This will happen whether or not you ran a credit report when you sold your property.

However, that is for the benefit of the note buyer. You should review the property buyer's credit history for your benefit before finalizing seller financing. This will also convey to the note buyer that proper due diligence was used in structuring your promissory note.

Ideally the buyer of your property who is also the payor on the note, is aware of your ongoing right to check their credit. But you probably don't want them to get surprised that someone else will do a credit inquiry when you are trying to sell your note.

As your note broker I would make the effort to make sure everone is on the same page when you are attempting to sell the note. But it is up to you to convey any such concerns about the note payor and contact them as needed.

Depending on your circumstances you may not need to give your promissory note much time to season before attempting to sell it. On the other hand you could make more of a planned exit to sell all or part of your note. I covered this above with regard to accepting the down payment in two installments, a year apart.

The planned exit strategy considers ways to improve the quality of your note before you sell it in order to receive a higher price. This concept implies that the way the note was structured to sell your property, may not be the ideal structure to sell your note for the best price.

You could have the real estate note written to start with a lower interest rate and a stated increase beginning a year or two later. So your plan would be not to sell the note till after the increase in the interest rate, and after some on time payments have been made showing the payors ability to make the larger payments.

Let's say that the property you are selling needs a fair amount of improvements. To make a deal you could accept a reduced down payment from the buyer who submits a written plan to renovate the property. You would then wait to sell the note until after a new appraisal based on the improved value.

A related concept is mitigating factors that improve the note from the start. If one factor you accept to sell the property reduces the value of the note, what other factors will improve the value of the note? If for example you accept a low interest rate, a larger down payment a higher credit score and a buyer experienced with the type of property could compensate for the interest rate.

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Have You Considered Selling Your Promissory Note?

If you have a note for sale, get started now. Please submit a worksheet, and I will start working to produce a deal for you.

As a note broker I will work with you to give you the best value for your note. This involves a more in depth analysis of your needs, your note and the best funding sources to approach on your behalf. This also includes presenting your situation to note buyers in the most favorable way. And my approach will not be limited by any one note buyer's requirements and note pricing. So TAKE ACTION NOW!

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