How does seller carry-back financing work on a commercial property?

Seller carry-back mechanics, lender-consent requirement, and tax treatment

Senior lender consent: a senior CRE lender will not allow a junior lien (including a seller second) without express consent and a subordination agreement. Senior lender requirements typically include: a defined cap on the junior lien (often 75% to 80% of property value combined CLTV), a non-disturbance agreement preserving the senior's foreclosure right, a standstill on junior remedies during senior workout, and approval of the junior note's coupon, payment, and maturity.

Junior-creditor protections in the subordination agreement: cure rights on senior default (junior may cure to preserve its security), a standstill window during which the junior cannot foreclose, and notice requirements for any senior modification or refinancing. These protections are negotiated, not standard. Counsel review is essential; the subordination agreement is the document that controls the seller's actual recovery rights.

Tax treatment: per IRS installment-sale rules (Section 453), a seller carry-back may permit the seller to recognize the deferred gain on receipt of principal payments rather than at closing, depending on the seller's posture and the deal structure. Installment-sale treatment is not automatic and is subject to dealer-property and other exclusions. This is not tax advice, installment-sale eligibility and timing require seller's tax counsel.

State-law variance: foreclosure procedures, deficiency-judgment availability, and seller-carry usury rules vary materially by state. Some states' usury caps are below typical commercial market rates and require specific commercial-loan exemptions. Always have state-specific counsel review the carry-back note, mortgage, and subordination agreement before signing.