Maryland General Assembly Imposes Transfer and Recordation Taxes on Transfers of "Controlling Interests" in Entities that Own Real Property in Maryland

During a special session of the Maryland General Assembly, Governor Martin O'Malley signed legislation that will impose transfer and recordation taxes on transfers of "controlling interests" in "real property entities" completed after June 30, 2008.

The intent of the legislation, passed as part of the Tax Reform Act of 2007, is to impose transfer and recordation taxes on transfers of a "controlling interest" in a "real property entity" as if the real property owned by the real property entity were conveyed by a deed or other instrument recorded in the jurisdiction in which the real estate is located.

Subject to limited exclusions and exemptions, the law will apply if:

1. The entity in which ownership is transferred is a "real property entity", which is defined as any entity (including limited partnerships, limited liability companies, corporations and trusts) that directly or beneficially owns real property in Maryland if that real property (1) constitutes at least 80% of the value of its assets, and (2) has an aggregate value of at least $1,000,000; and

2. The ownership interest in the Real Property Entity transferred is a "controlling interest", which is defined as more than 80% of the total value of all classes of stock of a corporation, of the beneficial interest in a trust, or of the total interest in capital and profits of any other entity.

The following examples illustrate the application of the new law:

Example 1: The sole asset of Entity I, LLC, a Delaware limited liability company, is a tract of land in Baltimore County valued at $1,500,000. Under the operating agreement of Entity I, LLC, only Managing Member, who owns 1% of the entity, is authorized to manage the affairs of Entity I, LLC. Investor Member A owns 89% of Entity I, LLC and Investor Member B owns the remaining 10%. Investor Member A sells all of its interests in Entity I, LLC to a developer on July 1, 2008 for $1,400,000. Although Investor Member A has no authority to manage or control the affairs of Entity I, LLC, its investor member interest exceeds 80% of the total interest in the company and therefore constitutes a "controlling interest" under the new law. Accordingly, the $1,400,000 paid for Investor Member A's 89% interest in Entity I, LLC will be subject to transfer and recordation taxes.

Example 2: MDREIT is a Maryland real estate investment trust. 80% of its assets consist of ownership interests in commercial properties across the State of Maryland and the other 20% consist of commercial properties located in Virginia and Delaware. NYREIT buys all of the beneficial interests in MDREIT on August 1, 2008. Under the new law, transfer and recordation taxes are imposed on the consideration payable for the interests in the real property entity, reduced by the amount of consideration allocable to assets other than the entity's Maryland real property holdings. Thus, transfer and recordation taxes will be imposed on the consideration that NYREIT paid for MDREIT, less that part of the consideration which is allocable to MDREIT's properties in Virginia and Delaware.

For assistance with transactions that may be subject to this legislation, contact Mark Keener at mkeener@gejlaw.com or 410 347 1366, or Tom Lewis at tlewis@gejlaw.com or 410 347 1356.