DC Metropolitan Business Law Alert - Updates on Important Legal Developments that Impact the Business Community in DC, Md and Va.

A year has passed since the Maryland legislature enacted a law that eliminated the recordation tax advantage gained by using an indemnity deed of trust (“IDOT”) in most Maryland counties (see our post from May 16, 2012, “Maryland Legislature Effectively Kills the IDOT”). Now just as zombies have overtaken vampires in popular culture, the Maryland lawmakers and Governor Martin O’Malley, being hip to popular trends, have enacted a law that, at least partially, brings the IDOT back from the dead.  The new law relieves certain borrowers from the imposition of the “vampire- like” recordation taxes that have struck at the throats of borrowers since last July 1, 2012 when the original legislation killed the IDOT benefit.   

The new law provides welcome relief for those commercial borrowers who have financed their projects previously using IDOTs.  The law provides the following clarifications about how recordation taxes will be imposed on the refinancing of commercial property and on the modification of existing IDOTs:  

A.        Recordation taxes will not apply to the outstanding principal balances of loans secured by IDOTs recorded prior to July 1, 2012.  Thus, modifications of IDOTs recorded prior to July 1, 2012 will only be subject to recordation tax on principal amounts in excess of the outstanding amount of the loan secured by the IDOT.  Importantly, the new law does not affect IDOTs recorded after July 1, 2012; they remain subject to recordation tax on the full amount of indebtedness originally secured.

B.        It is no longer necessary to follow the common practice of selling an existing commercial loan to a new lender when refinancing and then amending and restating the existing deed of trust (including IDOTs).  The new law effectively ends the common practice in commercial real estate financing transactions of the new lender purchasing the existing loan and deed of trust from the existing lender, and then entering into an amended and restated deed of trust with the borrower in order to avoid recordation taxes on the entire new loan amount.  The new law treats the refinancing of commercial loans in the same manner as residential loans; thus, recordation taxes will only be payable on the difference between the amount secured by the new loan and the principal amount outstanding immediately prior to the closing of the refinance transaction.

C.        The recordation tax exemption threshold for IDOTs is increased from $1 million to $3 million.  The change codifies existing regulations that provide the threshold amount subject to recordation tax relates to a single loan transaction of $3,000,000 or less, and the use of multiple IDOTs securing less than the $3 million each may be deemed to be part of a single loan transaction.  In determining the recordation tax, the $3,000,000 threshold refers to the amount of the loan regardless of the amount being secured by the applicable IDOT.  If the underlying loan is greater than $3,000,000, however, then the amount of recordation taxes payable in connection with recording an IDOT is calculated based on the amount actually secured by the IDOT and not the underlying loan amount.  For example, if a newly placed $4 million loan is secured by an IDOT limited to $3 million and recorded after July 1, 2012, there is no recordation tax due since the IDOT coverage does not exceed the threshold.

In CR-RSC Tower I, LLC v. RSC Tower I, LLC the Maryland Court of Appeal held that evidence of post-breach market conditions is not admissible to mitigate consequential lost profits if the contracting parties did not contemplate future market conditions at the time they entered into the contract. Specifically, the court determined that “consequential lost profits are calculated with reference to what the parties can reasonably be said to have anticipated when they entered into the contract” based on the information that was “known to the parties” when they contracted.

In this case, the court held that a commercial landlord could not introduce evidence of a real estate market crash that occurred after the breach of the contract in order to mitigate the consequential lost profits damages because, at the time the parties entered into the agreements that were the subject of the case, each party contemplated, and the terms of those agreements reflected, a relatively stable real estate market that would have resulted in profits to both sides. The court thus upheld a more than $36 million award against defendants who, after deliberately breaching and essentially refusing to go forward with their obligations under the contracts, were precluded from arguing that the final damages award was much too high in light of the changed market conditions resulting from the 2008 real estate crash.

This key case regarding the calculation of damages in Maryland highlights an extremely valuable lesson for those (e.g., land developers or potential real estate buyers or sellers) contemplating breaching a contract and betting that the cost of litigation will deter a prospective plaintiff from suing. A business person must ascertain in advance of deciding to breach what her/his ultimate final exposure may be. The Maryland Court of Appeals decision in CR-RSC Tower I will help immensely in that analysis.

The Virginia Supreme Court recently considered whether a municipal corporation has the authority to impose additional real property taxes against a tax paying entity which owns real property as a tenant in common with a tax exempt entity.  The court held that there is no such authority.

The City of Richmond sought to impose real property taxes (both prospectively and retroactively) on two properties that SunTrust Bank, a tax paying entity, and Richmond Redevelopment and Housing Authority (“RRHA”), a tax exempt entity, owned as tenants-in-common.  As a tax exempt entity, RHHA did not pay real property taxes on its interests in the properties.  Agreements between SunTrust and RHHA allowed SunTrust to use the entirety of the properties without paying rent to RHHA for use of its undivided interests in the properties.  The City contended that it had the authority to tax SunTrust for RHHA’s ownership interest because:

                i.  pursuant to the operating agreements, SunTrust had the exclusive right to use and possess the properties as if it were the fee simple owner;

                ii.  SunTrust did not use the properties for a "public purpose”; and 

                iii.  leasehold interests exempt from taxation of the owner are assessed to the lessee and the practical effect of the agreements between SunTrust and RRHA was to create a leasehold interest in RHHA’s undivided property interest.

The court held, however, that, as a tenant in common, SunTrust has the right to use and possess the properties without any agreement with RRHA; no Virginia law imposes a “public purpose” requirement to maintain RHHA’s exempt status; and the arrangement between SunTrust and RHHA do not constitute a leasehold because the parties are tenants-in-common.  Consequently, the City’s arguments did not prevail.  Throughout its opinion, the court indicated that holding title to the properties as tenants-in-common, rather than as joint venturers, was a significant factor in its decision. 

On January 6, 2011 a business law committee of the Maryland State Bar Association released a report  detailing its proposed revisions to the Maryland Limited Liability Company Act (the “LLC Act”).  The proposed revisions are intended to strengthen the LLC Act to ensure that "the maximum effect [is given] to the principle of freedom to contract and to the enforceability of operating agreements."  (See § 4A-102 of the Maryland Limited Liability Company Revision Act of 2011).  Additionally, the proposed revisions provide clarification of certain default rules governing the operation of a limited liability company when the members have not adopted an operating agreement.

The committee has not yet set a timeframe to submit a bill covering the proposed revisions for consideration by the Maryland General Assembly.  Moreover, before adoption of any revisions to the LLC Act, we expect additional modifications and refinements to address input from other interested parties.