On December 21, 2012, the Workgroup appointed by the Director of the Maryland State Department of Assessments and Taxation (SDAT) issued a Report on the impact of Senate Bill 1302 of the First General Assembly Session of 2012, involving the imposition of recordation taxes on indemnity mortgages and indemnity deeds of trust (either is called an IDOT) on commercial and residential real estate in Maryland. The Report may be found by clicking here final report.
IDOTs are used in financing transactions in which a loan is made to a borrower and is guaranteed by a different party. The guarantor secures its guaranty with a mortgage on its real property (the IDOT). Under prior law, no recordation tax was due on the IDOT when it was recorded. Senate Bill 1302 removed the ability to defer recordation taxes on IDOTs that are given in loan transactions in the amount of $1,000,000 or more and are recorded after July 1, 2012. Pursuant to Senate Bill 1302, the SDAT was required to appoint a workgroup to study the effect of the new law on residential and commercial real estate in Maryland and to prepare a report for the Governor and the Maryland General Assembly by the end of December, 2012.
To prepare its Report, the Workgroup reviewed recordation tax collections from a sample of 10 of the 23 Maryland counties plus Baltimore City. The Workgroup compared recordation taxes collected in commercial transactions in the sample jurisdictions in August, September, and October 2012 against the taxes collected in August, September, and October 2011. The Workgroup did not use July 2012 as part of its study because the members felt that that month was likely anomalous because many transactions were advanced to June 2012 in anticipation of the new law. The Workgroup was not able to use data from any month after October 2012 because of the deadline to issue the Report. Therefore, the Workgroup’s sample was limited.
The Fiscal and Policy Note for Senate Bill 1302 indicated that approximately $35.7 million would be raised each year by that bill. Based on this sample, the Report found that the State of Maryland collected, and will continue to collect, several times more recordation taxes as a result of Senate Bill 1302 than had been anticipated.
The Workgroup also reviewed questionnaires that four groups sent to their members and constituents about the effect of Senate Bill 1302 on them. These organizations prepared and collected surveys: the Maryland Bankers Association, the Maryland Chapters of NAIOP the Commercial Real Estate Development Association, the Homebuilders Association of Maryland, and Maryland's economic development community.
These surveys disclosed that the new law has adversely affected many Maryland businesses. A number of the responses indicated that that there has been a decrease in the volume and dollar amount of commercial real estate activity as a result of Senate Bill 1302. Certain of the respondents had delayed or canceled projects because of the new law. Other respondents stated that they modified their projects due to the new law or that they had passed the additional cost of the tax onto others.
The Report indicated the new law has not been applied in a uniform way across Maryland. To provide guidance about the applicability of Senate Bill 1302, the Office of the Attorney General and Baltimore County, Howard County, and Montgomery County have issued memoranda regarding the application of the new law in a number of circumstances, the documents that must be presented to the recording office when an IDOT is issued in a financing transaction, and the form of affidavit that must be executed and submitted at the time of recordation. Unfortunately, these memoranda are not entirely consistent with each other, and therefore the rules in this area now differ from county to county. As may be expected, this has caused confusion and uncertainty among title companies and practicing attorneys in Maryland, and it has led to delays in the recording of loan documents in a number of situations.
Ed Levin of Gordon Feinblatt’s Real Estate Practice Group served as a member of the Workgroup. The lack of uniformity in interpretation of Senate Bill 1302 throughout the State of Maryland is of particular concern. As part of his testimony to the Workgroup, Ed posted on the SDAT’s website the memoranda that the Office of the Attorney General and the county officials have issued regarding Senate Bill 1302 and the affidavits that they require. Ed also prepared and posted a summary and comparison of these memos. This information may be found at http://www.dat.state.md.us/IDOT.html.
We anticipate that several bills will be introduced in the 2013 session of the Maryland General Assembly regarding IDOTs, Senate Bill 1302, and the Report.
For questions about IDOTs, Senate Bill 1302, or the Workgroup’s Report, please contact Ed Levin at (410) 576-1900.