ANNAPOLIS-Last year the state of Maryland passed legislation that effectively made IDOTs, or Indemnity Deed of Trusts, functionality obsolete. IDOTs are a borrower structure that allowed companies to significantly reduce their borrowing costs, which at around 1.5% are among the highest in Maryland. Essentially, explains Centerline VP James Kelly, IDOTs used to allow borrowers to put off these costs until the property was sold. The legislation passed last July, eliminated that relief for loans over $500,000. Caps rates have dropped slightly since then, Kelly says, most likely as a result of this legislation.

"The increased cost in taxes to property owners directly impacts property values since a buyer must now discount the purchase price in order to achieve the same rate of return," he explains.

GlobeSt.com spoke with Kelly about the legislation and how, in his opinion, it has impacted deals in Maryland.

GlobeSt.com: How do IDOTs work exactly?

Kelly: IDOTs are structured so that the guaranty obligation is secured instead of the debt obligation. The grantor owns the collateral and pledges it as security for the loan made to the borrower. In an IDOT, the grantor's obligations under the guaranty are secured instead of the borrower's liability under the promissory note.

Recordation taxes in Maryland range between 0.5% and 1.0% depending on the county and are paid based upon the amount of debt on a property. For example, if a property trades for $20 million and debt of $16 million is placed on the property, it would incur recordation taxes of $160,000 ($16,000,000 x 1%).

GlobeSt.com: Are the costs really that burdensome?

Kelly: While the 1% recordation tax may seem mild when compared to the debt amount, it is quite significant when compared to the property's cash flow. Continuing from the example above, let's assume the property was acquired at a 7% cash-on-cash return, or a net cash flow of $1,400,000. After paying the mortgage of $862,166 (using a 3.5% interest rate), the net cash return to the borrower would be $537,834. Therefore, the borrower essentially just paid 29.8% of their Year 1 cash flow to recordation taxes.

GlobeSt.com: What would be the impact in the long term?

Kelly: Let's assume the property is worth $30 million and the borrower wants to refinance and increase their debt to $24 million. In this example, the recordation taxes now due would total $80,000 since the calculation is made based upon the net new debt ($24,000,000 - $16,000,000 = $8,000,000).

Look, changes to cash flows have a direct impact on the value of any asset. While the impact of this specific legislation on real estate prices is difficult to measure, it's clear that eliminating the ability of IDOTs to postpone recordation taxes has a direct effect on investors and their valuation of real estate in Maryland.