Maryland Rent Control, DC Lease Assignment Tax, and Increased Indemnity Deed of Trust Threshold

Rent control laws continue to evolve in Montgomery and Prince George’s Counties. The rent control law enacted last year in Montgomery County will become effective once regulations are adopted. Our recent Alert discussed these proposed rent control regulations as well as the many issues that remain with these proposed regulations. In Prince George’s County, a new rent control bill has been introduced that is similar to the Montgomery County rent control law. The Prince George’s County rent control bill and other matters affecting real estate in the DMV area are discussed below.

Prince George’s County Rent Control Bill. On June 4, 2024, the Prince George’s County Council (Council) introduced CB 55-24, which includes many of the provisions and concepts included in the rent control law in Montgomery County. On June 18, 2024, the Council accepted several amendments to CB 55-24 including a lower rent cap for age restricted senior housing facilities, as well as vacancy control (i.e., limits on the re-rent rates on vacant units). The next public hearing on CB 55-24, is scheduled for July 16, 2024, at 1:30 pm. Council Member Ivey has stated that she wants CB 55-24 passed before the Council’s recess in August. If the Council enacts CB 55-24, as amended, the current temporary emergency rent cap of 3 percent will be replaced with a permanent rent cap equal to the lessor of (i) 3 percent plus the Consumer Price Index for All Urban Consumers for the Washington-Arlington-Alexandria Area (CPI-U), or (ii) 6 percent. In age-restricted senior housing facilities, a lower rent cap equal to the lessor of CPI-U or 4.5 percent will be applicable. New leases, as well as renewals, will be subject to rent caps with no exception for vacant units.

Similar to Montgomery County, if CB 55-24 is passed, a landlord that does not increase the rent by the full annual allowance, will be permitted to “bank” the difference and apply it to a new or renewed lease for the rental unit, but the total increase may not exceed 10 percent of the base rent. There are proposed exemptions for renovations and new construction – rental units will be exempt from rent control if they were constructed after January 1, 2000 or if the building was substantially renovated after January 1, 2000. Unlike Montgomery County, if CB 55-24 is passed, rent control in Prince George’s County becomes effective without the requirement for published regulations, except that certain provisions (such as banking and the substantial renovation exemption) do not take effect until the regulations become effective. The initially proposed rent caps, the lessor of 3 percent plus CPI-U or 6 percent and the age-restricted senior housing facility rent cap, would be in effect from October 17, 2024 until July 1, 2025. Adjustments to rent caps in subsequent years will be established by the Department of Permitting, Inspections, and Enforcement (DPIE) and become effective on July 1 of each year thereafter, with notice to the public of the new rent cap by May 1 of each year. CB 55-24 proposes that the Director of DPIE has until January 1, 2026 to adopt and publish rent control regulations, which would become effective 30 days after publication. Unlike the current temporary rent control law in Prince George’s County, there is no sunset provision applicable to CB 55-24. If it becomes law, it will remain in effect unless amended or repealed. We plan to continue to work with stakeholders impacted by rent control on potential legal or legislative solutions.

Montgomery County Expanded Right of First Refusal (ROFR) Regulations. As discussed in a previous Alert, the Montgomery County Council recently enacted Expedited Bill 38-23, which allows the Department of Housing and Community Affairs (DHCA) to assign ROFR rights to “qualified entities,” similar to the ROFR law in Prince George’s County. On June 14, 2024, DHCA provided proposed ROFR regulations to the Montgomery County Council for review and consideration. The proposed regulations establish the application process to become a “qualified entity,” and set the selection criteria for a qualified entity to become a DHCA assignee. Under the proposed regulations, a qualified entity applicant is required to (i) certify that it has complied with all housing laws, (ii) commit in writing to not disclose information received from DHCA, (iii) demonstrate expertise and experience in acquiring, owning, operating, managing, and developing rental and affordable housing, (iv) demonstrate a commitment to community engagement, (v) demonstrate other criteria DHCA may require, and (vi) be registered and licensed to do business in Maryland, and in good standing under Maryland law. In addition, ROFR assignees may only evict tenants for just cause and increase rents in accordance with the voluntary rent guidelines for 15 years, “unless the units are covered by other agreements that ensure long-term affordability of greater than 15 years or as otherwise required by law”. (The voluntary rent guidelines published by the County Executive in February 2024 currently limit rent increases to 2.6 percent per year). A designation as a “qualified entity” would only last three years before reapplication is necessary. The criteria to become a DHCA assignee includes, but is not limited to, (a) committing to preserve the current affordable housing units at or below 70 percent Area Median Income, (b) committing to create more affordable housing units, (c) funding amounts requested by the “qualified entity,” (d) funding availability, and (e) demonstrating that the “qualified entity” has expertise in acquiring, owning, managing, operating and developing rental and affordable housing. The Montgomery County Council has 60 days from June 14, 2024, to accept or reject the expanded ROFR regulations.

DC Lease Assignment Transfer and Recordation Tax Notice. On May 17, 2024, the DC Office of Taxation and Revenue (OTR) released a notice regarding the treatment of recordation and transfer taxes for an assignment of a lease. This notice comes after the MEPT St. Matthews, LLC v. District of Columbia, 297 A.3d 1094, 1099-1100 (DC 2023) decision, in which the DC Court of Appeals ruled the assignment of a lease is taxable in the same manner as a newly created lease. The Court of Appeals also ruled that the assignment of a lease may transfer other property interests and that the transfer of those other real property interests may be separately taxable. OTR’s latest notice sets forth OTR’s position that a lease or ground rent with a term of at least 30 years (including extensions) is taxable when initially created and at each subsequent assignment or transfer. When the extension of a lease is for a term of at least 30 years, the extension is also taxable. Calculation of the amount of transfer and recordation taxes will depend on whether other real property interests are assigned at the time the lease is transferred. When no other real property interest is transferred, the transfer and recordation taxes are based on the capitalized average annual rent and additional consideration for the lease assignment. When other real property interests are transferred with the lease assignment, each real property interest is considered taxable regardless of how the transaction is structured or effected. As each real property interest is considered taxable, the transfer and recordation taxes will be based on the consideration paid, or, if consideration is zero or nominal, the fair market value of the real property interests.

Maryland Increased Threshold for Indemnity Deeds of Trust. Effective July 1, 2024, the threshold for Maryland Recordation Tax (Recordation Tax) deferral on indemnity deeds of trust increased from $3,000,000 to $12,500,000. This increase applies statewide.

An indemnity deed of trust (IDOT) is a financing structure that was widely used for decades in Maryland to defer Recordation Tax on commercial real estate financing transactions. With an IDOT, the deed of trust is granted by a guarantor of the loan, not directly by the borrower. Under Maryland case law, the guarantor’s liability was considered to be a contingent liability until enforced. Prior to July 2012, Maryland did not require payment of Recordation Tax on an IDOT at the time of recording; instead, collection of Recordation Tax, if ever, was deferred until a default on the loan by the borrower, at which time the guarantor’s liability would be non-contingent. In 2012, the Maryland General Assembly limited availability of this deferral to IDOTs under $3,000,000.

As of July 1, 2024, the Recordation Tax deferral threshold for IDOTs increased from $3,000,000 to $12,500,000. This increase will make the Recordation Tax deferral for IDOTs available to a broader range of commercial real estate financing transactions. For more information and details on the application of the Recordation Tax deferral for IDOTs, please see our prior alert on this topic.

We will continue to provide updates to these and other relevant industry initiatives and issues. Should you have any questions please reach out to CondoMultifamilyTeam@ballardspahr.com.

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