A year has passed since the Maryland legislature enacted a law that eliminated the recordation tax advantage gained by using an indemnity deed of trust (“IDOT”) in most Maryland counties (see our post from May 16, 2012, “Maryland Legislature Effectively Kills the IDOT”). Now just as zombies have overtaken vampires in popular culture, the Maryland lawmakers and Governor Martin O’Malley, being hip to popular trends, have enacted a law that, at least partially, brings the IDOT back from the dead.  The new law relieves certain borrowers from the imposition of the “vampire- like” recordation taxes that have struck at the throats of borrowers since last July 1, 2012 when the original legislation killed the IDOT benefit.   

The new law provides welcome relief for those commercial borrowers who have financed their projects previously using IDOTs.  The law provides the following clarifications about how recordation taxes will be imposed on the refinancing of commercial property and on the modification of existing IDOTs:  

  1. Recordation taxes will not apply to the outstanding principal balances of loans secured by IDOTs recorded prior to July 1, 2012.  Thus, modifications of IDOTs recorded prior to July 1, 2012 will only be subject to recordation tax on principal amounts in excess of the outstanding amount of the loan secured by the IDOT.  Importantly, the new law does not affect IDOTs recorded after July 1, 2012; they remain subject to recordation tax on the full amount of indebtedness originally secured.
  2. It is no longer necessary to follow the common practice of selling an existing commercial loan to a new lender when refinancing and then amending and restating the existing deed of trust (including IDOTs).  The new law effectively ends the common practice in commercial real estate financing transactions of the new lender purchasing the existing loan and deed of trust from the existing lender, and then entering into an amended and restated deed of trust with the borrower in order to avoid recordation taxes on the entire new loan amount.  The new law treats the refinancing of commercial loans in the same manner as residential loans; thus, recordation taxes will only be payable on the difference between the amount secured by the new loan and the principal amount outstanding immediately prior to the closing of the refinance transaction.
  3. The recordation tax exemption threshold for IDOTs is increased from $1 million to $3 million.  The change codifies existing regulations that provide the threshold amount subject to recordation tax relates to a single loan transaction of $3,000,000 or less, and the use of multiple IDOTs securing less than the $3 million each may be deemed to be part of a single loan transaction.  In determining the recordation tax, the $3,000,000 threshold refers to the amount of the loan regardless of the amount being secured by the applicable IDOT.  If the underlying loan is greater than $3,000,000, however, then the amount of recordation taxes payable in connection with recording an IDOT is calculated based on the amount actually secured by the IDOT and not the underlying loan amount.  For example, if a newly placed $4 million loan is secured by an IDOT limited to $3 million and recorded after July 1, 2012, there is no recordation tax due since the IDOT coverage does not exceed the threshold.