Dinsmore’s Commercial Finance Practice Group frequently handles mortgage transactions where the mortgaged property is located in Maryland. One popular finance mechanism in Maryland has been the indemnity deed of trust or “IDOT”.
On July 1, 2012, the State and Local Revenue Financing Act of 2012 (“SLRFA”) will go into effect in Maryland, effectively closing the “IDOT loophole.” Under an IDOT structure, a property owner forms a new entity – typically a wholly owned subsidiary of the property owner - to be the borrower. The property owner then guarantees the borrower’s obligations on the mortgage loan and secures this guaranty by executing an indemnity deed of trust in favor of the lender. In nearly all counties in Maryland, an indemnity deed of trust is not subject to Maryland’s recordation tax because the obligation being secured – the property owner’s guaranty of the Borrower’s obligations under the note – is a contingent obligation.
Subject to a few exceptions, SLRFA closes the IDOT loophole by stating that the property owner/guarantor is deemed to be a primary obligor. For purposes of determining the recordation tax, the obligations under the guaranty are deemed to be incurred to the same extent that the borrower incurs the debt under the note.
SLRFA does not apply to an indemnity deed of trust securing a guaranty of a loan for less than $1,000,000.00. The determination of recordation tax on construction loans over $100,000 will not be affected by SLRFA. Purchase money deeds of trust will continue to be exempt to the extent of the purchase price provided that deed of trust is dated within 30 days of the date of the deed and recorded within 30 days of the date the deed is recorded. It is unclear; however, what effect SLRFA will have on the modification of an existing indemnity deed of trust for which recordation tax have been deferred. Currently, under the Tax-Property Article of the Annotated Code of Maryland (the “TPA”), instruments recorded to confirm, correct, modify or supplement a previously recorded instrument (“supplemental instruments”) are exempt from recordation tax except to the extent actual consideration is payable on the supplemental instrument or the amount secured has increased. If this exemption is preserved under the SLRFA, then the challenge will be to structure a refinance so that an existing indemnity deed of trust can be modified.
The State Department of Assessments and Taxation is required to study the impact of this change. The final report is due to the Governor and General Assembly by no later than December 31, 2012.
This change to Maryland’s IDOT structure will have significant implications for lenders, investors and other parties with real estate assets located in Maryland. As part of Dinsmore’s regional focus, we will continue to monitor legislative developments related to SLRFA.