As a result of recent Maryland legislation, commercial property owners currently considering the financing or refinancing of their real estate may achieve significant recordation tax savings when using so-called “indemnity deeds of trust” (known as “IDOTs”). IDOTs are deeds of trust (or mortgages) which encumber the property of a Borrower’s guarantor, as distinguished from the property owned by the Borrower. Up until last year, IDOTs generally escaped the recordation tax on the basis of Maryland attorney general opinions interpreting how the recordation tax statute applied to IDOTs. Last year, the General Assembly adopted legislation imposing a recordation tax upon IDOTs securing loans of $1 million or more. This year, Senate Bill 436 significantly amended the IDOT tax legislation, including expanding the exemption amount of $1 million so that tax savings can now be achieved for loan transactions up to $3 million.
In addition to taxing IDOTs, the 2012 legislation created additional recordation tax problem with IDOTs. First, any IDOT, securing $1 million or more, which had been recorded prior to July 1, 2012 (the effective date of the 2012 legislation) was essentially frozen in place because the statute seemingly provided that any amendment to that IDOT could trigger recordation tax upon the full secured amount – even if the amendment did not change the secured amount. Moreover, for non-exempt IDOTs recorded after July 1, 2012 for which recordation tax has been paid, ambiguity in the 2012 statute raised the spectre that any subsequent amendment to that IDOT could cause the recordation tax to be imposed again on the entire secured loan amount. In other words, the recordation tax could be imposed again and again on each amendment to the same IDOT, whether or not the secured loan amount ever changed.
The new 2013 legislation accomplishes several things which are positive for property owners and developers. In summary:
1. the threshold loan amount for imposing the IDOT recordation tax has been increased from $1 million to $3 million, which significantly expands the pool of loan transactions for which the IDOT tax can be avoided entirely.
2. the new legislation provides that the IDOT tax will not be applied to debt incurred and secured by IDOTs recorded prior to July 1, 2012. In other words, such IDOTs can be amended of record without incurring recordation tax on the original debt which remains outstanding at the time of the amendment, even though no recordation tax was ever paid on such original debt. Recordation tax would only apply to the secured debt under the amended IDOT to the extent it exceeds the outstanding principal balance of the loan immediately prior to the amendment.
3. For those IDOTs recorded after July 1, 2012 and for which recordation tax has already been paid, the new legislation allows such IDOTs to be amended, or even refinanced with a new lender, without incurring recordation tax, except to the extent the amended or refinanced debt exceeds the unpaid principal balance of the original debt for which recordation tax was paid. In other words, recordation tax would only apply to the “new money” funded under the loan modification or refinance transaction.
Senate Bill 436, which was signed into law on May 2 by Governor Martin O’Malley, will take effect July 1, 2013. Accordingly, property owners currently considering commercial property financing transactions (or refinancings of existing IDOTs) between $1 million and $3 million should consider whether it may be worthwhile to postpone the financing until then.