Recordation Tax Now Charged Upon Recordation of Indemnity Deeds of Trust Securing a Guarantee of a Loan or Related Loans of $3,000,000 or More

Governor Martin O’Malley signed legislation this week that will again significantly impact the use of Indemnity Deeds of Trust (IDOTs) in Maryland.

Until July of 2012, many loans in Maryland involved an IDOT structure. Using an IDOT structure, a loan is made to a borrower and guaranteed by a third party.The third party guarantor secures its guaranteed obligations with a deed of trust on its real property. The guarantor’s deed of trust is an IDOT, because it secures the guarantor’s contingent liability. Pursuant to Maryland law, the contingent nature of IDOT obligations means that recordation tax is not due at the time the IDOT is recorded. Rather, payment of recordation tax is deferred until the contingent obligation becomes a current, direct liability of the guarantor.

On July 1, 2012, legislation took effect that limited the recordation tax deferral for IDOTs to transactions where the IDOT secured a guarantee of repayment of a loan of less than $1,000,000. This legislation, combined with the aggressive efforts of Maryland counties to collect recordation taxes on the original principal amount of certain IDOTs amended after July 1, 2012, led to an outcry from lenders and guarantors forced to deal with sweeping changes to established Maryland lending practices.

The Maryland General Assembly reconsidered last year’s IDOT legislation in its most recent session and decided to make significant changes to the relevant statutes. The new IDOT legislation does the following and is effective as of July 1, 2013:

• Clarifies that only IDOTs recorded on or after July 1, 2012 are subject to recordation tax on the original loan amount and explicitly permits amendment of IDOTs filed prior to July 1, 2012 without triggering payment of recordation tax on the original loan amount.
• Specifies that recordation tax will not be payable at the time of recordation of any IDOT securing a guaranty of a loan or multiple related loans of less than $3,000,000.
• Creates a commercial mortgage refinancing exemption from recordation tax similar to the exemption available for residential mortgage refinancing.
• Confirms that an IDOT recorded in multiple counties is not subject to recordation tax in each county based on the full amount secured.

Given the changes and clarifications regarding recordation tax chargeable on IDOTs, lenders should again review the loans in their pipelines. The changes coming on July 1, 2013 may benefit lenders and their customers with transactions involving an IDOT structure.

For more information about this topic or assistance with financing issues, please contact one of the authors or any member of the Ober|Kaler Finance Group.