A bill approved by the Maryland General Assembly would raise the maximum threshold amount of money that an indemnity deed of trust (IDOT) may secure on a loan and still benefit from recordation tax exemptions.
House Bill 371 would allow a third party to a loan to guaranty a loan of less than $12.5 million without having to pay recordation tax on IDOTs, breathing new life into a loan structure that was commonly used several years ago. If signed by Gov. Wes Moore, the new law would go into effect July 1, 2024.
An IDOT – and indemnity mortgages more generally – is a loan structure in which a lender loans money to a borrower and repayment of the loan is guaranteed by a third party using a security interest on the third party’s real property as collateral. The third party’s guaranty is a contingent liability and does not become due unless and until the borrower defaults on the loan obligation.
Because of the contingent nature of this liability, Maryland law defers recordation tax on IDOTs until the payment secured by the IDOT becomes due to be paid by the guarantor. The recordation tax can range from 0.5% to 1.4% of the total loan amount in Maryland, depending on the county. Thus, the use of IDOTs to defer this cost was a popular way to structure loans.
A series of laws passed in 2012 and 2013, however, created new subsection 12-105(f)(7) in the Maryland property tax recordation statute. This capped the maximum amount a third party could guaranty for a loan and still qualify for the IDOT recordation tax exemption at less than $3 million. This limit was for both individual loans and a series of loans that were a part of the same transaction. The subsection, then, effectively eliminated the primary benefit of IDOTs for most commercial loans.
The new law would revise subsection 12-105(f)(7) to significantly raise the maximum amount a third party can guaranty for a loan to less than $12.5 million. It also would require counties to report to the Senate Budget and Taxation Committee and the House Ways and Means Committee on the amount of taxes that would have been collected but for the existence of the exemption.
If the new law goes into effect, many developers and commercial borrowers in Maryland will once again have the opportunity to structure their loans to utilize the IDOT recordation tax deference and keep down associated loan costs.
