Until recently, Maryland was known for a unique financing structure known as the indemnity deed of trust (IDOT) by which even the largest commercial real estate loans might be made free of recordation tax. In an IDOT scenario:
- the lender makes a loan to the borrower
- the loan is guaranteed by a property-owning affiliate of the borrower
- the guaranty is secured by the guarantor’s property though the IDOT
Because of the contingent nature of the guaranty, Maryland had taken the position that no recordation tax is payable on the IDOT unless and until a defaults occurs and the guaranty is called. However, this has all changed due to recent legislation and explanatory guidance issued by the Office of the Maryland Attorney General. Companies nationwide have utilized this singular IDOT structure to finance their Maryland property acquisitions for years without incurring recordation taxes, and out-of-state borrowers may not be aware of this crucial change in local law.
Starting on July 1, 2012, IDOTs securing loans of $1 million or more will be taxed on the entire amount secured by the IDOT at the time of recordation. It is important for current Maryland IDOT borrowers across the country to be aware of an alarming consequence of this new legislation: some Maryland counties have already taken the position that if a borrower amends an IDOT loan over $1 million which was made prior to July 1, 2012 (including if the IDOT is assigned to a new lender and amended and restated), the amendment should be taxed on 100 percent of the debt, including the original principal amount of the loan. For example, if an existing IDOT for $900,000 is amended to $1.1 million after July 1, 2012, then the entire $1.1 million will be taxed. Even if a preexisting IDOT of $1 million or more is amended (to include additional property or for another reason) after July 1 without changing the amount secured, the recordation tax will be assessed on the entire debt.
What Will This Mean in Practice?
Any property owner currently using IDOT-secured financing now faces hefty and unanticipated recordation taxes should the IDOT need to be amended or modified, and any future refinance of existing IDOT debt will likely be taxable. The use of new IDOTs to secure major commercial loans will likely slow to a trickle and may become extinct. Memoranda have been issued by the Maryland Office of the Attorney General and some counties, and will likely continue to be issued from other sources as the new legislation takes effect and clarifications are needed. There will continue to be unique circumstances and complicated scenarios that require further interpretation of the new law, and as stated by the Office of the Attorney General, “we’ll blow up those bridges as we come to them.”