What does carrying paper on a small commercial building actually involve for the seller?

Question

A scenario that comes up often with owner-users. An operator is selling the shop building the business runs out of and leasing something cheaper across town. The building is free and clear, no mortgage. The most interested buyer runs a similar-size outfit and wants the seller to carry. Where sellers in that spot get stuck is vocabulary. Promissory note, deed of trust, balloon, amortization schedule. Each word is understandable alone but the way they fit into one deal is not. And the phrase that gets used is that a carrying seller is now the bank, which sounds like a lot more than collecting a check. What does the actual set of documents look like on something like this, and what does a seller in that spot pay to have it put together properly?

Rena Guide · Accepted Answer

The pieces fit together like this. The promissory note is the buyer's written promise to pay: amount, interest rate, payment amount, when payments are due, what happens if they're late. It's the debt itself. The deed of trust, or mortgage depending on which your state uses, is a separate document that attaches that debt to the building. It's what gives you the right to force a sale of the property if the note isn't paid, and it gets recorded with the county so anyone looking at title can see your lien. Recording practice and which instrument your state uses differ by state.

Amortization schedule is just the month-by-month table showing how each payment splits between interest and principal. A balloon means the payments are calculated as if the loan runs 25 or 30 years, but the whole remaining balance comes due on a specific earlier date, often year five or seven. So the buyer pays a comfortable monthly amount, then has to refinance or sell to hand you the rest.

On cost: an attorney drafting a note and security instrument for a straightforward commercial deal is commonly in the low thousands, title insurance and escrow are separate and priced off the sale amount, and recording fees are small. Some states charge transfer tax at closing, some don't.

"You're the bank" mostly means someone has to track payments, apply them correctly, confirm the buyer's insurance and taxes are current, and send annual interest statements. A third-party loan servicer does that for something like $20 to $40 a month plus a setup fee. That ledger matters if the deal ever ends up in a dispute, which is why sellers use one instead of a spreadsheet.

laurenkim53 · Answer

On a small commercial carry like this, the documents are the note, the security instrument, and a closing statement from whoever handles escrow. The note is the promise, the deed of trust or mortgage is what lets you take the building back. An attorney to draft both, plus title work, is the real cost and it varies a lot regionally.

Rena Expert · Answer

Adding the commercial-specific parts, since @rena-guide covered the base documents.

Buyer is an operating business, so you want a personal guaranty from the principals, not just the entity on the note. An LLC with a truck and a lease behind it is not collateral. Get financial statements and two or three years of returns before you agree to terms, the same way a bank would, and ask what happens to his revenue if he loses his largest customer.

On the building itself, price the environmental question. Shop uses mean floor drains, waste oil, sometimes an old underground tank. If you carry paper and later take the property back through foreclosure, you're the owner of whatever condition it's in. A Phase I environmental site assessment on a small building typically runs in the low thousands, and knowing what's there before you close is worth more to you as the lienholder than it is to him as the buyer.

Structure detail people skip: if you're leasing space back or the buyer is leasing part of it to a third party, put an assignment of rents in the security instrument and say clearly what happens to those leases in a default. Otherwise you can end up foreclosing into a building with a tenant on terms you never agreed to.

One more. The installment sale treatment that makes this attractive spreads gain over the years you collect principal, and depreciation recapture on a commercial building doesn't get that treatment in the same way, so a chunk can land in the year of sale. Run the actual numbers with your CPA against your basis before you set the down payment, because the down payment is what determines how much tax shows up first.

renee_dubois · Answer

@rena-expert on the recapture point, that is the one that should change how a seller thinks about down payments. A seller who takes a big down payment because it feels safer can end up paying tax in year one on money he then has to hold in reserve anyway. @angela_burke, the other thing about carrying on a building your own business used: your buyer knows exactly what's wrong with it because he does the same work. That cuts both ways. He won't be surprised by the electrical, and he'll also know precisely which deferred item he can point at if he wants to renegotiate at the balloon.

What does carrying paper on a small commercial building actually involve for the seller?

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