[authors: James E. Goodrich and Ann L. Ramsey]
On May 22, 2012, Maryland's Governor O'Malley signed legislation mandating that indemnity mortgages and indemnity deeds of trust will be subject to recordation taxes. Property owners now have just over a month to refinance their properties or pay higher taxes.
Effective July 1, 2012 commercial property refinancings in Maryland will become more expensive in many instances. Property owners have a little over a month to refinance their properties or pay higher taxes starting on July 1. As part of legislation passed by Maryland's General Assembly in a special session and signed into law by Governor O'Malley on May 22, 2012, as of July 1, 2012, indemnity mortgages and indemnity deeds of trust will be subject to recordation taxes that range, depending on the county, from 0.5 percent to well over 1 percent of the secured debt. It appears, however, that the new law does not affect an exemption for modifications of existing loans, which would mean that in such modifications only the amount of any new debt would be subject to recordation taxes.
For the past several decades, recordation taxes for loans on Maryland properties already owned by a borrower could be avoided through the use of indemnity deeds of trust or "IDOTs." Under a typical IDOT structure, the property owner would form a separate entity, usually a wholly-owned subsidiary of the property owner, to be the borrower. The property owner would guaranty the borrower's obligations under the note, and the guaranty would be secured by a deed of trust or mortgage. One key to this arrangement was that the property owner's guaranty would not be a "primary obligation" but, instead, contingent on the borrower's default under the note. Several Maryland Attorney General opinions supported the notion that an IDOT was a contingent obligation and that recordation tax only would be due if the obligation no longer were contingent – for example, if the lender called the guaranty and foreclosed on the property. Debt incurred in connection with the acquisition of property (known as "purchase money" debt) is typically exempt from Maryland recordation taxes, so the IDOT structure was more often used in connection with refinancings.
The new legislation subjects "indemnity mortgages" to recordation tax in the same manner as if the guarantor were primarily liable under the guaranteed loan. The bill defines an "indemnity mortgage" as including "any mortgage, deed of trust, or other security interest in real property that secures a guarantee of repayment of a loan for which the guarantor is not primarily liable." The bill also provides that "[s]ecured debt with respect to an indemnity mortgage is deemed to be incurred for purposes of this subsection when and to the same extent as debt is incurred on the guaranteed loan."
The bill contains two exceptions. It does not apply to the extent recordation tax is paid on another instrument of writing that secures payment of the guaranteed loan. For example, if the borrower is merely adding property to enhance the collateral for a loan and had already paid recordation tax on the loan, recordation tax would not be due on a deed of trust encumbering the additional property. Nor does the new law apply to an indemnity mortgage that secures a guarantee of repayment of a loan for less than $1,000,000.
The new law does not alter the provisions of Section 12-105(f) of the Tax-Property Article of the Annotated Code of Maryland ("TPA"), which allow, with respect to a construction loan over $100,000 where the total amount of the debt secured has not been incurred at the time of recording, recordation taxes to be paid only on the principal amount of the debt incurred at that time. Construction borrowers can still pay the taxes incrementally, within seven days following each advance under the loan.
The new law also appears to leave intact the exemption from recordation taxes set forth in Section 12-108(e) of the TPA for "supplemental instruments of writing." That exemption provides that "a supplemental instrument of writing is not subject to recordation tax except to the extent that: (1) actual consideration is payable on the supplemental instrument of writing; or (2) the amount of debt is increased by the supplemental instrument of writing." Section 12-101(l) of the TPA defines a "supplemental instrument of writing" as "an instrument of writing that confirms, corrects, modifies, or supplements a previously recorded instrument of writing." Accordingly, under this exemption if a borrower refinances an existing $3 million loan, and the original IDOT is merely modified (rather than replaced with a new security instrument), then the new law appears only to tax any increase in the debt, and not to tax the pre-existing face amount of the IDOT. This places a premium on maintaining existing IDOTs and gives lenders under existing IDOTs a competitive advantage over new loans. It will be interesting to see whether a practice develops in Maryland refinance situations whereby existing IDOTs are preserved, transferred among lenders and then modified to suit the new lender's requirements.