In Maryland, IDOTs have been used historically to defer the payment of recordation taxes that otherwise would have been due and payable had a lender and a borrower entered into a financing arrangement secured by a conventional deed of trust. As a result of 2012 and 2013 legislation, Maryland effectively has eliminated the benefit of IDOTs in commercial transactions except for loans not exceeding $3,000,000.
In an IDOT (Indemnity Deed of Trust) structure, there are two obligor parties to a loan: a borrower, who is directly liable under the promissory note, and a guarantor, who guarantees the payment obligations of the borrower and secures its guaranty with a deed of trust on the secured property. Pursuant to an IDOT guaranty, the guarantor becomes directly liable for payment of the loan upon the borrower’s default. Based on a long-standing reading of the Maryland Code by the Office of the Maryland State Attorney General, an IDOT has been found to secure a contingent guaranty obligation (i.e., arising as a result of the borrower’s default) rather than a direct debt obligation. Therefore, in most Maryland counties, the obligation to pay recordation tax on a recorded IDOT has been deferred until such time, if ever, that the contingent debt payment obligation under the guaranty was triggered (e.g., upon a borrower default). In Maryland, certain transactions also give rise to state and county transfer taxes, and although the effect of these taxes should be considered, transfer taxes are outside of the scope of this article.
Commencing on July 1, 2012, IDOTs securing a debt obligation in excess of $1,000,000 became subject to recordation tax at the time of recordation in the same manner as conventional deeds of trust. This major change in the tax law had a significant impact on the cost of financing commercial real estate in Maryland. For example, in Montgomery County, Maryland, the legislation increased the cost to enter into a commercial real estate secured loan over $1,000,000 by approximately one percent (1%). The law effectuating this major change, however, spawned many new issues relating to existing IDOTs, including the application of taxes in connection with the refinancing of existing IDOTs, and/or the amendment of IDOTs. In response to concerns raised by the real estate community, the Maryland General Assembly amended the Maryland recordation statute.
Commencing on July 1, 2013, IDOTs securing loans in the amount of $3,000,000 or more are treated the same as conventional deeds of trust in Maryland; that is, the loans are subject to the recordation tax. However, it is now clear that the tax deferral for existing IDOTs has been preserved (even if the recordation tax was not previously paid), and existing IDOTs may be modified without incurring a recordation tax, including modifications that eliminate the IDOT structure in favor of a conventional mortgage loan structure. Also, it is clear that an existing IDOT that is supplemented or modified to secure amounts greater than the original indebtedness guaranteed by the grantor of the original IDOT, results in a recordation tax (at the regular rate) only on the additional money secured by the IDOT. Finally, so long as the grantor (or the controlling interest in the grantor) has not changed, a loan secured by an IDOT which is refinanced is subject to the recordation tax (at the regular rate) only on the additional money secured by the new deed of trust.
In short, for new loans, there is no longer a recordation tax savings related to the IDOT structure securing loans at and above the $3,000,000 threshold since IDOTs are taxable to the same extent as conventional deeds of trust. Because existing IDOTs can be refinanced using conventional mortgage documentation and because the acquisition of existing IDOT loan documents is no longer required to avoid recordation tax payment, the increased costs and complication of the IDOT structure are no longer justified.