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.