In Maryland the use of Indemnity Deeds of Trust are a simple path to save your borrowers $5 to $7 per thousand on their closing costs for commercial loans, but proper structuring of the transaction is essential to meet the statutory guidelines. If you structure the transaction with recordation tax avoidance in mind at the time of the loan application, you can add value for your borrower and avoid a last minute scramble.
Satisfying the Statutory Requirements
To avoid taxation, you must make the owner of the collateral property a guarantor on the transaction, rather than the borrower. They must (1) guarantee the loan and (2) they cannot have any primary liability under the promissory note, including by an agreement between the borrower and the guarantor themselves.
The underlying logic of the exemption is that the guarantor themselves don't owe anyone any money at the time of the signing of the Deed of Trust and therefore there is no consideration to be taxed at the time of recording. This same logic can be applied to avoid taxation on Deeds of Trust securing Letters of Credit.
At closing, the borrower, title company or lender will be required to sign an affidavit to the clerk of the court that the instrument complies with the basic statutory requirements and evidence of this compliance will need to be submitted with the recording package to the clerks. In Anne Arundel County there will also be an additional affidavit required from the Borrower affirming that no private agreement relating to the debt exists between the Borrower and Guarantor.
The Guarantors/owners of the real estate cannot expect to have the loan proceeds used for their benefit or disbursed to them at closing as that would conflict with the idea that they are not the Borrower.
Major Change on July 1st, 2024
As of July 1st 2024 the cap on loan size for indemnity deeds of trust is being increased from $3,000,000.00 to $12,500,000.00. A major savings for businesses looking to leverage their real property for commercial debt.
Structuring the Transaction
When putting together the loan proposal for your Borrower a strategic Commercial Loan officer should identify who the owner(s) of the proposed Collateral Property or Properties are and determine whether they could serve as appropriate guarantors. Many sophisticated owners of commercial real estate already hold title to their properties in real estate entities that are separate from their main source of income or cashflow allowing the loan officer to make the primary income producing entity or the individual owner themselves the borrower easily.
Depending on your lending guidelines, if the Borrower does not have a separate entity that is appropriate to serve as Borrower a new entity can be created to serve as the Borrower. However, be aware that this entity will have no intrinsic value for repayment of the loan itself so that will need to be clear to your loan committee. In addition, the new Borrowing entity must stay in good standing for the life of the loan, so there will need to be enough tax savings to justify the cost of continuing maintenance of the entity by the Borrower until the Maturity Date.
Working with the right team
When utilizing an Indemnity Deed of Trust it is important that you are engaging knowledgeable bank counsel as well as a title company that is comfortable and experienced disbursing and recording transactions like these. A title company that specializes in residential transactions may have limited experience with recording these instruments, leading to uncertainty and delays. Bank counsel from outside the Maryland/DC/Virginia market is unlikely to understand the nuances of compliance with the statute leading to unnecessary restrictions or confusion at the closing table.
Indemnity Deed of Trust on Purchase Transactions
An indemnity deed of trust cannot be used as a purchase money deed of trust. Typically a Purchase Money Deed of Trust is already exempt from recordation tax and therefore the issue does not come up, but when your borrower wants to borrow an amount greater than the purchase price (let's say for a construction escrow) and wants to avoid recordation tax you will need to treat that additional amount as a separate loan to a different entity in order to utilize an indemnity deed of trust.
Every Maryland Commercial Loan Officer should familiarize themselves with Indemnity Deeds of Trust in order to serve their client base and avoid unnecessary taxation for their borrowers. Be sure to discuss the requirements in depth with your bank's counsel to understand exactly what the transactions will look like and when they can be utilized.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
