As businesses and industries begin to come back to life after the recent shutdown, borrowers will need to manage their transaction costs as they obtain new capital to get the wheels going again.  Using an Indemnity Deed of Trust, also referred to as an IDOT, as collateral for a loan can be an effective tool to mitigate these costs.  Unique to Maryland, IDOTs are a deed of trust granted by one or more of the guarantors of a loan who are pledging their real property as collateral, rather than the borrower doing so as you see in traditional loan structures.  IDOTs are recorded and create a lien on the guarantor’s property like other deeds of trust, but, when used properly, the recordation tax usually assessed at the time of recording is deferred for IDOTs.  This tax can commonly be one of the top two or three most expensive charges for loan transactions, which is what makes IDOTs so popular. While IDOTs have been used in Maryland for a while, we frequently get questions about how to properly structure loans using IDOTS to receive the tax deferral.


The Tax Deferral

Recordation tax is one of the taxes you incur when transferring an interest in real property in Maryland. These taxes are levied on applicable instruments, such as a deed or deed of trust, when recording them in a county land records office and are based on the consideration or principal amount of debt incurred in the documents.  The tax rate varies in each county between 0.5% – 1.3% of the loan amount, which means $5,000 – $13,500 for a million-dollar loan. Under an IDOT, the guarantor is not primarily liable for the loan, rather, their liability is contingent on the occurrence of a future event of default under the loan documents. Maryland law provides that when certain requirements are met, IDOTs are exempt from recordation tax at recording because they secure a liability that has not yet come due. The recordation tax is deferred until the lender exercises its available remedies against the property.[1]


IDOT Requirements

In order to qualify for this tax deferral certain requirements must be met.  First, IDOTs are only effective to defer recordation tax for loans less than $3 million. Regardless of how much of the note the IDOT secures, if the underlying note or notes secured by an IDOT is for more than $3 million, the recordation tax is due at the time of recording like traditional deeds of trust.  Further, the party or parties granting the real property as collateral under the IDOT have to guarantee the underlying loan evidenced by a guaranty agreement.   As for the IDOT itself, there must be language specifying that the IDOT secures a contingent indebtedness, specifically the guarantee, in the document.  This language is usually located near the beginning of the IDOT confirming that the grantor is not primarily liable for the indebtedness and will not incur any debt until a default occurs under the promissory note. These requirements are closely scrutinized at the time of recording so it is important to consider them when structuring a loan on the front-end to insure recording at the back-end goes smoothly.


The Recording Package

In addition to the aforementioned requirements being satisfied, multiple documents need to be included with an IDOT when presented to the county finance office and clerk’s office that are not required for traditional deeds of trust and other recorded documents.  The IDOT itself will be examined for the same requirements as traditional deeds of trust, plus those highlighted above.  The recording package will also need to include a copy of the promissory note, a copy of the guaranty agreement for the grantor under the IDOT, a copy of the settlement statement or comparable document signed by the grantor under the IDOT as guarantor, and a document referred to an IDOT affidavit.  The copies of the promissory note, guaranty, and settlement statement are all to confirm that only the borrower signed the note and grantor did in fact guarantee the indebtedness of the promissory note.  The clerk will also be looking for an IDOT affidavit.  This affidavit can be signed by the grantor, lender’s counsel, or the settlement attorney.  The affidavit affirms, among other things, that the guarantor is not primarily liable for the indebtedness, the grantor is guarantying the loan by way of a guaranty, that the guarantor of the IDOT is a separate entity from the entity who signed the note, and that the indebtedness is less than $3 million. Lastly, some jurisdictions in Maryland, such as Anne Arundel, require an additional affidavit from the borrower to be included with an IDOT for recording, which affirms there is no separate note or agreement between the borrower and grantor of the IDOT.


IDOTs are a creative finance tool that can help borrowers mitigate costs, but preparation of the loan documents and recording package can be complex.  In order to ensure compliance with all of the various requirements be sure to consult with an attorney well versed in both structuring and drafting the loan documents as well as preparing the recording package to make sure the county will accept the IDOT and apply the tax deferral.


[1] Planning Tip: A properly prepared and packaged IDOT will exempt the recordation tax in Prince George’s County, however, do not forget Prince George’s County also collects their county transfer tax on deeds of trust, and this tax is not exempt when using IDOTs.



About Liff, Walsh & Simmons

Liff, Walsh & Simmons is a full-service business law firm serving the legal needs of small businesses and privately held middle-market companies, their owners and operators, and individuals throughout their business and family life cycles in the mid-Atlantic region.  From helping entrepreneurs bring their business visions to market, to representing middle-market companies in business transactions and disputes, to preserving the wealth that a family business has worked so hard to earn, we take pride in providing value-driven solutions and great results.  Our responsive service is focused on general and transactional business advice, commercial and civil litigation, real estate, land use, finance, and estate planning and administration.  At Liff, Walsh &  Simmons, we are Experienced, Innovative, and Entrepreneurial.


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Paul Skrickus

Paul Skrickus

Paul Skrickus serves as Counsel to Liff, Walsh & Simmons. Additionally, he is the Director of Commercial Operations at Eagle Title. As the head of the commercial title team, he and his team oversee and manage all transactions involving commercial property insured by the firm. Paul has over seven years of commercial title processing and underwriting experience. He has been integral to the division’s growth over the last decade into one of Maryland's best commercial title agencies. Before his role at Eagle Title, Paul was an associate with Liff, Walsh & Simmons, serving as a member of the firm’s Real Estate, Commercial Finance, and Business Law Practice Groups. In his real estate transactions practice, he routinely assists clients in every phase of the real estate sale and acquisition process, including drafting and negotiating purchase and sale agreements, commercial and residential leases, and deeds, as well as counseling clients through their diligence and inspection.

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