Virginia secures real estate loans with a deed of trust rather than a mortgage, and on a commercial loan that document carries some weight worth understanding. Let me explain how it works and what the recording tax on it looks like.
Written by Adam L. Engel, Esq., Principal and real estate attorney at Prime Title & Escrow
When a commercial property is financed in Virginia, the loan is almost always secured by a deed of trust. It is the instrument the lender records to put a lien on the property, and it is also one of the larger line items at closing because of the recording tax that comes with it. Understanding the deed of trust helps a commercial borrower read the closing statement and plan for the cost.
This sits alongside the title coverage I describe in my guide to commercial title insurance, since the lender’s policy insures the very lien the deed of trust creates.
Virginia uses a deed of trust, a three party security instrument with the borrower, the lender, and a neutral trustee, instead of a mortgage. It lets the lender foreclose through a trustee sale if the loan defaults. Recording it carries a state recordation tax of 25 cents per $100 of the loan amount under Virginia Code Section 58.1-803, with reduced rates on very large loans and on certain refinances, plus a local share.
Why Virginia uses a deed of trust
A mortgage is a two party instrument between borrower and lender. A deed of trust is a three party instrument. The borrower conveys a security interest to a neutral trustee, who holds it for the benefit of the lender until the loan is paid. Virginia is a deed of trust state, so this is the standard structure on residential and commercial loans alike. The practical advantage to lenders is the trustee’s power of sale, which allows a nonjudicial foreclosure if the borrower defaults, generally a faster path than a court supervised foreclosure.
The trustee and substitution of trustee
The trustee named in a deed of trust is usually not involved unless something goes wrong. If the loan defaults and the lender decides to foreclose, the trustee conducts the sale under the terms of the deed of trust and Virginia law. Lenders frequently substitute a different trustee at that point by recording a substitution of trustee, which is routine. For a commercial borrower, the key point is simply that the trustee structure is what makes the lender’s remedy work.
What the recording tax costs
Recording the deed of trust triggers Virginia’s recordation tax. Under Virginia Code Section 58.1-803, the state tax on a deed of trust is 25 cents on every $100, or portion of $100, of the amount of the obligation it secures. On a commercial loan, where the principal is large, this is a meaningful figure. A local recordation tax is generally added on top of the state amount. I break down how recording taxes work across a transaction in my guide to the Virginia recordation tax.
Virginia steps the rate down on very large deeds of trust. The first portion of the secured amount is taxed at the full 25 cents per $100, with reduced cents per $100 applying to amounts above set thresholds. On a large commercial loan this graduated schedule can lower the effective rate, which I will factor into your cost estimate.
Open-end and revolving deeds of trust
Many commercial deals use an open-end, credit line, or revolving deed of trust, where the borrower can draw, repay, and redraw. For these, Virginia bases the recording tax on the maximum amount that may be outstanding at any one time under the deed of trust, not the amount currently drawn. So if a line allows up to a certain ceiling, the tax is generally figured on that ceiling. This is worth knowing when you size a line of credit, because the secured maximum drives the cost to record.
Refinances and the same-lender rule
Refinancing a commercial deed of trust can carry a reduced recording tax. Virginia provides a lower graduated schedule for a deed of trust whose purpose is to refinance an existing debt on which the tax was already paid. Separately, when the refinance is with the same lender that holds the existing debt, the tax can apply only to the portion of the new loan that exceeds the old balance. These provisions are specific, so I confirm how they apply to your refinance and make sure the deed of trust is documented to claim the right treatment.
Recordation tax compared to the deed
It helps to keep two separate taxes straight. The recordation tax on the deed transferring the property is based on the sale price, and in Virginia the seller also pays a grantor’s tax, which I cover in my guide to the Virginia grantor’s tax. The recordation tax on the deed of trust is a different charge, based on the loan amount, and it is the borrower’s cost. On a financed commercial purchase you will see both. In Northern Virginia, additional regional fees can apply to the deed as well, which I describe in my article on the Northern Virginia regional fees.
Send me your loan amount and structure and I will estimate the recording tax on your deed of trust and walk you through the rest of the closing costs.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
What is a deed of trust and how is it different from a mortgage?
A deed of trust is a three party security instrument with the borrower, the lender, and a neutral trustee, while a mortgage is a two party instrument. Virginia uses deeds of trust. The trustee holds a security interest for the lender and can conduct a nonjudicial foreclosure sale if the borrower defaults.
How much is the recording tax on a commercial deed of trust?
Under Virginia Code Section 58.1-803, the state recordation tax is 25 cents on every $100, or portion of $100, of the amount the deed of trust secures, with a local tax generally added. Reduced graduated rates apply to very large loans and to certain refinances.
How is the tax figured on a line of credit or open-end deed of trust?
For an open-end, credit line, or revolving deed of trust, Virginia bases the recording tax on the maximum amount that may be outstanding at any one time under the instrument, not the amount currently drawn. The secured ceiling drives the cost, which is worth considering when you size the line.
Is the recording tax lower on a refinance?
It can be. Virginia provides a reduced graduated schedule for a deed of trust that refinances an existing debt on which the tax was already paid. When the refinance is with the same lender holding the existing debt, the tax can apply only to the portion of the new loan that exceeds the old balance.
Who pays the recording tax on the deed of trust?
The recording tax on the deed of trust is based on the loan amount and is generally the borrower’s cost. It is separate from the recordation tax and grantor’s tax on the deed transferring the property, which are tied to the sale price. On a financed purchase you will see both kinds of charges.
Who is the trustee on my commercial deed of trust?
The trustee is a neutral party named in the deed of trust who holds the security interest for the lender. The trustee is usually uninvolved unless the loan defaults and the lender forecloses, at which point the trustee, or a substitute trustee the lender appoints, conducts the sale under Virginia law.
This article is general information about commercial real estate closings in Virginia and West Virginia. It is not legal advice for your specific transaction, and your costs and requirements depend on your deal. Please confirm the details with me directly.