New law restricts IDOTs and increases commercial financing costs in Maryland

One means by which the budget and taxation bill that recently cleared the Maryland Legislature will increase state tax revenues is by substantially restricting the utility of indemnity deeds of trust (“IDOTs”) as a legally sanctioned means to avoid the current payment of mortgage recordation taxes on commercial real estate loans.  Under current law, the owner of commercial property can establish a separate business entity to act as the borrower on a commercial real estate loan, and the owner can guaranty the loan and secure the guaranty with an IDOT.  The separate entity that is established to borrow the funds can be a subsidiary of the property owner.  When this structure is used to have separate entities serve as borrower and guarantor on a loan, no current recordation tax is owed on the IDOT.  Once the new law goes into effect on July 1, 2012, it will be applicable to all IDOTs over one million dollars recorded on or after July 1, 2010, and will make IDOTs unattractive for most commercial deals.  Although state tax revenues will thereby increase, so will the costs of commercial real estate financing in Maryland.