Group suggests NYC sell tax liens.

Group suggests NYC sell tax liens 

With New York City property tax delinquencies mounting to hundred of millions of dollars, a group of real estate professionals is lobbying the city to institute a tax sale auction system for all property types, other than single family homes.

The group, known as "Collect," says the city would get its money in a timely fashion, and at the same time, lien certificate holders could help owners keep up the properties. Critics say the city is now the bank of last resort for many owners, is making a lot of money on the accruing interest, and should not have to give up this lucrative practice to speculators who would not be interested in the properties that need the help most.

Stephen F. Anfang, founder of Collect, said the city will be owed between $500 million and $712 million in tax receivables by the end of fiscal year 1992. The city's economy could be stabilized, he said, if these otherwise uncollected tax dollars were collected and revenues would not have to be found elsewhere.

"Maybe we could reduce the taxes, which makes it more appealing for people to rent," Anfang said.

Property tax escalations now count as a major expense for commercial tenants and experts say a reduced property tax would be encouraging to businesses. "It's one way of dovetailing into a tax freeze," Anfang noted.

Collect's board is made up of Jeffrey Gural, president of Newmark & Co.; Steven D. Bloom, a partner with Robinson, Silverman Pearce Aronsohn & Berman; Jack Weprin, a partner in Goldberg Weprin & Ustin; Howard Zipser, a partner in Rosenman & Colin, and other real estate attorneys and professionals.

Anfang feels that the purchasers of these liens would give the owners more flexibility in dealing with abandonment. "Who knows how many buildings could be saved?" he said.

The city has taken title to 1,009 properties this year from four boroughs.

Queens has not vested this year, but last year, the city took 299 parcels. The city became the owner of a total of 1,586 buildings in 1990 but only 930 the year before.

While the city is becoming owner of these parcels, thousands more are in workout or delinquent situations. For instance, in July, a Manhattan action was commenced against 4,034 properties, most of which had been delinquent since the prior year.

City officials say, nevertheless, most of these owners will not abandon the properties but pay the taxes over time.

A Finance official said there are several issues that must be looked at in researching the possibility of tax lien sales. "Most of the buildings that are delinquent and that eventually go in rem," he explained, "are the ones where an investor, in order to make money, has to get rid of the tenants because they aren't' paying their rents for a whole host of social issues.

"For commercial buildings, the issue is a strict sort of rate of return question," he explained. "They pay healthy interest (18 percent) and it is set that high to get them to pay up quickly. We take very few commercial properties in rem. For the period they are delinquent, we make money."

The official said any investor would have to beat that rate of return for it to be worthwhile for the city. "There are cash flow reasons why the city might want to give up the return to get the immediate money," he said. "That is why we haven't told these folks it is not a swell idea. That is a judgement you make if you really need the cash today."

The official said if you subtract the single-family homes and the multi-family homes that are too "politically problematic," it is not even going to approach the hundreds of millions due. Then, he said, only a small component is going to attract investors. "It could be a small number and it is not to say it shouldn't be done and explored, but to say it is the magic solution to the city's crisis, is not necessarily so."

Other officials said the city has managed to collect nearly 100 percent of its property taxes within two to three years, plus interest, with owners working out up to an eight-year payment plan.

In Fiscal 1990 Finance officials said they collected $35 million in interest on all delinquent real estate taxes. At the end of Fiscal 1991, it is estimated that $47 million in interest was collected.

For all real estate charges due in Fiscal Year 1990, there was $229 million in delinquencies.

"We continued to collect money against prior years," the official explained. "People tend to forget we collect substantial money in the later years. During Fiscal 91 we collected nearly a $100 million of that $229 million."

For the Fiscal Year 1991, the total open balance was $315 million of which the city has collected, through the end of November, $84 million. The city is forecasting a net delinquency for fiscal year 1992 of $312.8 million which is expected to go up not more than another $40 million due to reserves, refunds and credits.

"In most instance the buildings with the highest values tend to pay off," the official said. "Additionally, the mortgage company would want to protect their own rights and step in and pay the taxes as well."

Collect $ Now

Bloom said the increase in all taxes is really subsidizing the owners who are not paying currently due real estate taxes.

"To me, it is far less important that the city may be able to obtain real estate taxes in three years, even with an attractive interest rate, than to have immediate tax dollars available to pay for vital city services which are desperately needed."

Anfang discounts critics who say the city is making a lot of money on its delinquency collections, which are paid at 18 percent interest. "Whatever percentage of accounts receivables are sold it would be more money in the treasury," Anfang said. "Otherwise, a lot of these properties will become abandoned."

The selling of a tax lien, Anfang said, is not meant to put owners into a worse position but would just get the city its money in a timely fashion.

One attorney, who requested anonymity, expressed concern for his clients because he felt a lien holder would foreclose on the property much faster than the city, which, he said, he could "jerk around" for three or four years.

The position of lien holders is being explored by Collect members. Bloom, an attorney board member said, "While a mortgagor might be able to enforce a mortgage to the extent that they might be able to compel, with cause, the owner to repair the property, that might not be true here."

"Real estate taxes have priority liens," Anfang explained, adding that it would not matter if there were a mortgagor. In fact, Collect expects the mortgagor to be glad that the taxes are being paid. He thinks the lenders would begin a cottage industry of loaning money to investors for the express purpose of buying tax liens as this becomes an acknowledged form of investment.

"When you know real estate you can analyze the potential value of the real estate," Anfang said. In fact, he said, he intends to start a fund to invest in tax liens himself.

Anfang said Collect is drawing up guidelines now and is overhauling current city legislation which does permit tax lien sales. "Presently the city has power to do it," Anfang said.

City officials said lien sales were stopped in 1948 because it was not cost effective. At that time, they estimated it cost approximately $400 to sell a lien.

Explore the Idea

Henry J. Stern, president of the Citizen's Union, said it seems like an interesting idea. "We'd like to see it pursued and see if it can be worked out to help the city," he said. Stern said his group wants to ensure that city interests are protected but also wants to see the best possible result for the city. "It's an idea worth exploring," he added.

Collect has sparked the interest of at least two city councilmen, Sheldon S. Leffler a Queens democrat, who is a member of the Revenue Enhancement Committee, chaired by Manhattan Democrat Stanley Michels, and Michels himself.

"This is being studied by our staff to see whether it requires further attention," said Steve Simon, a spokesman for Michels. "It's an intriguing idea and we are doing some research on it." Simon said a Council hearing on the subject will probably be held in the beginning of next year.

Corey Bearak, a spokesman for Leffler, said [The city is] not supposed to be a bank," he said. "We think this is something that merits a good look. Sometimes arelatively modest proposal can help because it makes people address the problem. "That's better for the economy," he said.

Bearak said the aim of the tax lien sale would not be to have one set of people benefit by buying a property at a tax auction. "But, if there is a property which is not a go," he said, "we will have a mechanism whereby someone can acquire the property and make it work."

By the time many properties are sold at the city's regular auctions, Anfang said, they are too run down since owners who are delinquent on property taxes, may also not have the funds to keep up the building.

How it Works

Collect expects the tax liens would be auctioned after six months of delinquency - "before the building gets milked," Anfang explained - with the winner being the investor offering the lowest rate of interest to the building's owner. Properties at greater risk might have to pay more in interest, while a better property, attracting more bidders, could pay much less, he said.

Anfang said there is a lot of investor money sitting in bonds and treasuries at low rates of interest, and he expects the tax lien sales to be attractive as the investors could receive more interest through the lien certificate purchase. Bidding would occur on the interest rate side and not the amount due, Anfang noted. In addition, he expects all present and future taxes would still be owed to the city by the original property owner with any subsequent delinquencies being sold at a new auction. If the taxes are not paid by the original owner to the lien holder within and as yet unspecified period of time, the lien holder may go to deed to obtain the property.

While the lien sales would create a market for investors and would establish a rate of return through the auction process, it is expected that other investors would be looking to obtain an interest in the properties. Collect believes that in the long run this would diminish the number of the properties that would ultimately be abandoned. "It's been very successful in other jurisdictions," Anfang said, "and we've been in touch with officials in Chicago." A recent tax sale in Cook County (Chicago), Illinois generated $53 million, and of 90,000 to 100,000 properties auctioned each year year, 35 percent are sold.

"If, New York City were to sell 35 percent of its uncollected taxes," Anfang noted, "this would represent $260 million in funds for the city over the three-year period from 1990 to 1992.

Working with business and legal representatives would be a good first step for the city, Anfang said, suggesting the city will need a citizen's committee to work with "on an entrepreneurial basis" to make this successful.

"I'm doing this as a citizen, a taxpayer and a long term resident of New York," Bloom said. "I feel the city needs the revenue and its important for the city's economy. The better the services, the healthier the city."