Real Estate Law

Troutman Sanders LLP: Important Maryland Legislation Update - Recordation Tax on Indemnity Deeds of Trust

By M. Kevin McCustyMargaret "Ann" Ann BrownR. Craig FitzenreiterKimberly Hargrove and Jackson W. Prentice

Indemnity deeds of trust (IDOTs) have historically been used in commercial finance transactions secured by real property located in the State of Maryland to avoid the payment of state recordation taxes at the time an IDOT is recorded. Currently, the Maryland State Senate and House of Delegates have approved proposed legislation that would impose recordation tax on IDOTs securing obligations of more than $1,000,000. The new law would become effective on July 1, 2012.

By way of background, in a loan transaction structured to use an IDOT to avoid Maryland recordation tax, the grantor and owner of the real property securing the loan is not the borrower issuing the promissory note to the lender. Instead, the grantor is a guarantor of the loan (and almost always an affiliate of the borrower) and the loan transaction is structured such that the IDOT secures the grantor's obligations under the guaranty rather than the borrower's liability under the promissory note.

According to a 1973 Maryland attorney general opinion, which was reaffirmed in a 1989 Maryland attorney general opinion (published at 74 Op. Att'y Gen. 281 (1989)), the grantor is not obligated to pay state recordation tax at the time the IDOT is recorded because the grantor's liability is a contingent liability and therefore the underlying debt is not actually incurred by the grantor at the time of closing. The obligation to pay recordation tax is triggered by and when this contingent liability becomes a direct liability of the grantor (such an event is typically triggered by a default under the guaranty or the underlying loan documents).

The IDOT deal structure has been used extensively in Maryland for decades resulting in considerable savings for borrowers. For example, in Baltimore City the recordation tax rate is $5.00 per every $500 (or fraction thereof) of principal amount of the debt secured. Thus, for a loan of $25,000,000 secured by real property located in Baltimore City, the IDOT structure provides a recordation tax savings of $250,000.

Although not yet final, the current language in the proposed law calls for the application of the recordation tax to IDOTs that secure a guaranty of repayment in excess of $1,000,000. The new law is expected to take effect July 1, 2012.

Anticipating this change, lenders and borrowers should consider accelerating the closing of Maryland real estate loan transactions where an IDOT may be used, so that closing occurs before July 1, 2012.

The experienced real estate finance attorneys at Troutman Sanders LLP are available to respond to any questions you may have about this legislation or to assist with any loan closing that you may fast-track in order to beat this looming July 1, 2012 deadline.

©Troutman Sanders LLP


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