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Increased Threshold for IDOT Recordation Tax Deferral Takes Effect in Maryland on July 1, 2024

June 28, 2024

Dave McRae

A statutory amendment enacted by the Maryland legislature in 2023 will be taking effect next week, on July 1, 2024, under which the threshold for indemnity deed of trust (IDOT)-secured loans to qualify for State recordation tax deferral will be increased from $3 Million to $12.5 Million. This change will create a great opportunity for Maryland commercial real estate owners (and prospective purchasers) who are seeking loan financing, to be able to achieve substantial transactional cost savings by utilizing an IDOT-secured loan structure.

IDOTs<a id="footnote1-ref" href="#footnote1"><sup>1</sup></a> are a type of security instrument that may be used in real estate – mostly commercial property – secured lending transactions, where the property that is encumbered as collateral for the loan is owned not by the borrower of the loan, but rather, by a guarantor (who is in most cases a party affiliated with the borrower).

The Maryland General Assembly has long taken a unique position with respect to IDOTs, one that is not followed in most other states or the District of Columbia, that, because an IDOT secures the financial obligation of a guarantor only, and because the guarantor’s obligation is contingent (unlike the borrower’s obligation, which is direct and primary), there is no requirement to pay State recordation tax on the face value amount of the instrument at the time of IDOT recordation, but rather, the tax payment requirement is deferred until such time, if ever, that the borrower defaults on the loan, causing the guarantor’s loan payment obligation to change from a contingent to a direct, non-contingent liability.

Because most IDOT-secured loans are paid off or refinanced without any default, the State recordation tax deferral that has been available in Maryland for these loans has had the practical effect of being an exemption from that tax, providing a substantial cost savings to the borrower (and affiliated guarantor) when compared with loans structured with the property owner as the borrower and thus secured by a borrower-granted deed of trust, for which all recordation taxes must be paid at the time of recording.

For many years, the recordation tax deferral that was available in Maryland for IDOT-secured transactions applied to IDOTs of any amount. Then, effective as of July 1, 2012, the Maryland General Assembly amended the law by limiting the applicability of the recordation tax deferral to only those IDOTs securing guaranties of indebtedness of less than $1,000,000 – a comparatively small amount in the overall scope of commercial real estate-secured lending transactions taking place throughout the state. The 2012 amendment effectively eliminated, except as to those smaller loan transactions, the cost savings that Maryland commercial property borrowers and affiliated guarantors had up to that time been able to achieve by utilizing an IDOT structure. For loans of $1,000,000 or more, recordation tax computed on the face value amount of the real estate security instrument would need to be paid at the time of recording, regardless of whether the parties utilized an IDOT structure or a borrower-granted deed of trust structure.

The 2012 amendment was widely criticized by Maryland’s lenders and commercial property owners, who complained about the substantial departure it effectuated from longstanding, established lending practices in the state. The General Assembly thus took up the issue again a year later and enacted further amendments, which took effect as of July 1, 2013, to soften some of the harshest impacts of the 2012 law.

First of all, the 2013 amendments tripled the new threshold loan amount for qualifying for recordation tax deferral in a Maryland IDOT-secured transaction, from $1,000,000 to $3,000,000. Additionally, the 2013 amendments clarified the law on multiple fronts, including several provisions intended to protect parties who had entered into IDOT-secured loan transactions prior to July 1, 2012 that qualified for recordation tax deferral under the laws then in effect, but would not have qualified for such tax deferral had their loan closing and IDOT recordation occurred after July 1, 2012 (or after July 1, 2013, if applicable). For example, among other things, the 2013 amendments clarified that such loans could be modified, and written amendments to the original IDOT could be recorded in the land records of the applicable jurisdiction, without triggering the requirement to pay recordation tax based on the fact that the face value amount of the originally recorded IDOT exceeded of the threshold(s) subsequently established under the 2012 and/or 2013 amendments.

The 2023 amendment will more than quadruple the current threshold loan amount for qualifying for recordation tax deferral in a Maryland IDOT-secured transaction, from $3,000,000 to $12,500,000. The General Assembly enacted this amendment in recognition of the fact that the increases in real property values, as well as in construction costs, that have taken place over the past decade (-plus) have caused the $3,000,000 threshold established in 2013 to become a more restrictive condition on Maryland’s commercial property lenders and their customers with each passing year. The other provisions of the law as amended by the 2013 amendments will continue in force and effect under the new loan threshold established by the 2023 amendment.

To obtain the benefits of the (now expanding) recordation tax deferral available to Maryland commercial property owners and prospective purchasers by structuring loan financing transactions that are IDOT-secured, it is necessary to take special care to document the transaction properly.

For more information, please contact the attorneys at RKW with any questions about IDOT-secured loan transactions, to see if this change in the law could benefit you!

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<div id="footnote1" style="    color: var(--midnight-blue); text-align: justify; margin-top: 20px; font-family: Arial, Helvetica Neue, Helvetica, sans-serif; font-size: 14px; line-height: 24px;">[1] For purposes of this article, the term “IDOTs” is used to refer not only to indemnity deeds of trust, by which the property is collaterally granted to a trustee(s) for benefit of the lender, but also to indemnity mortgages, by which the property is collaterally granted directly to the lender. Likewise, any mention of “deeds of trust” in this article should be construed as meaning deeds of trust or mortgages. <a href="#footnote1-ref" aria-label="Return to footnote 1 referring content."> ↵ </a></div>

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