Jack Machen, Special Chief Solicitor for Baltimore City, contributed the following article that stems from the 2013 Advanced Real Property Institute Plenary Session “IDOTS Are Not Past Tense – Refinancings After July 1, 2013.”
The 2013 revisions to Tax Property Article 12-108(g) allow commercial mortgages, including IDOTs, to be refinanced without incurring additional recordation tax in the same manner as previously applied only to residential mortgages. Only the new money (face amount of the new mortgage/deed of trust in excess of the outstanding principal balance of the loan being refinanced) is subject to the recordation tax.
The exemption requires that the refinance be made by “the original mortgagor” which is defined to include (a) a person that assumed the debt secured by real property that the person purchased and paid the recordation tax on the consideration paid for the property and (b) the trustee of an inter vivos trust if the trustee or settlor of the trust originally assumed or incurred the debt.
Expanding the scope of the exemption beyond individuals and residential loans to cover entity borrowers on commercial loans expands the possibilities of what can be considered an “original mortgagor.” For example, would the refinancing mortgagor qualify as the original mortgagor in the following situations?
1. General or limited partnership converts to an LLC.
2. Limited partnership elects to become registered as an LLLP.
3. Individual operating as a “real estate enterprise” under TP 12-108(bb) transfers the subject property to an LLC.
4. Maryland LLC merges into a Delaware LLC.
5. Deed in dissolution of an LLC to the original member under TP 12-108(q).
6. Transfer from one LLC to another, both of which are wholly-owned by the same parent LLC.
7. ABC LLC and XYZ LLC own property as tenants-in-common. ABC buys out XYZ (recordation and transfer taxes paid on the deed), and in the same transaction, the existing loan is refinanced. Is ABC considered “the” original mortgagor even though originally there were two mortgagors?
8. Same facts except that a new entity buys out XYZ so there are two mortgagors on the refinance, but only one of them was an original.
9. ABC LLC owns two properties that are separately financed. ABC refinances both at the same time with one loan from one lender.
And in the residential context:
10. Husband and wife divorce. Wife gets the house and seeks to refinance.
11. Husband dies. Surviving spouse seeks to refinance.
12. Individual dies. Estate seeks to refinance.
County attorneys advising recording clerks have not always come up with the same answers to all these questions. Based on a strict reading, the word “the” preceding “original mortgagor” would suggest that there needs to be complete identity between the mortgagor on the original debt and the mortgagor on the refinancing, except where the statute expressly provides otherwise in the cases of (a) a transferee that paid recordation taxes and assumed the debt and (b) certain trust transfers.
A liberal reading would provide some allowance for death, divorce or one co-tenant buying out another when there is no new person coming into title. In the case of multiple mortgagors before and/or after, there have been instances where there was a partial exemption granted, on the theory that where one party is being released from liability, there is consideration that should be subject to the tax.
Comments on these questions and other scenarios are welcome.