Maryland Governor Martin O'Malley has signed a law that brings significant changes to how recordation tax will be imposed on the refinancing of commercial property and on the modification of existing indemnity deeds of trust (IDOTs).
The new law brings clarity to how refinancing of commercial loans will be treated and brings much needed relief to the financial consequences of last year's legislation, which effectively killed the use of IDOTs in the state's commercial transactions. It becomes effective on July 1, 2013, and should be of interest to those who own commercial property in Maryland.
Taxation of Refinancing of Commercial Property and Orphaned IDOTs
The new legislation in Maryland extends to commercial property owners the recordation tax exemption previously reserved only to individuals refinancing their primary residences. Beginning on July 1, 2013, any borrower (whether an individual, corporation, limited liability company, partnership or other entity) that refinances an existing loan will be taxed only on any "new money" borrowed (i.e., the difference between the principal balance of the old loan on the date of refinance and the principal amount of the new loan). This eliminates the cumbersome practice of having the current lender assign its deed of trust and note to the new lender and then having the new lender amend and restate the prior loan documents.
The new Maryland law also allows a borrower that had financed its property with an IDOT to take advantage of the expanded recordation tax exemption and have the IDOT refinanced with a "normal" deed of trust on which recordation tax would be imposed only on any "new money." The elimination of most IDOTs in 2012 left commercial borrowers with the unexpected and unwelcome prospect of paying recordation taxes on the entire new loan when the current IDOT loan reached maturity and needed to be refinanced. The new law, while not bringing back the glory days of tax-free IDOTs, grants substantial relief to these orphaned IDOTs by limiting recordation taxes on refinancing only to any "new money," which in many cases will result in the savings of thousands of dollars in transaction costs.
Supplemental Instrument and Modification of Existing IDOTs
The 2012 legislation that imposed recordation tax on most IDOTs — and the subsequent guidance issued by the Maryland attorney general and many counties — resulted in recordation taxes being imposed on the entire principal indebtedness secured by an existing IDOT upon the recordation of almost any modification or change made to the IDOT. The new law clarifies that a "supplemental instrument" includes any instrument that confirms, corrects, modifies, supplements or amends and restates a previously recorded instrument regardless of whether recordation tax was paid on the document being confirmed, corrected, modified, supplemented or amended and restated. A "supplemental instrument" under the new legislation is subject to recordation tax only if and to the extent that the supplemental instrument provides for new consideration over and above the principal balance of the loan on the date the supplemental instrument is entered into. As a result, the new law permits existing IDOTs to be amended or corrected without recordation tax consequences unless the amendment evidences new consideration, in which case the recordation tax will apply only to the extent of the "new money."
IDOTs Securing Up to $3 Million
The 2012 legislation exempted from recordation tax IDOTs securing less than $1 million. The new law increases that threshold amount to $3 million. It does not change the prohibition against the use of multiple IDOTs in the same transaction where each IDOT falls below the threshold requirement but in the aggregate all of the IDOTs secure more than $3 million.
Maryland's new law clarifies that an IDOT that secures a loan in excess of $3 million but states in the instrument that the lien of the IDOT is capped at an amount below the $3 million threshold amount will be exempt from recordation taxes. Under interpretations of the 2012 legislation, IDOTs securing a loan in excess of the threshold amount were taxed on the entire loan despite language that would cap the lien to an amount below the threshold.