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New in rem policies announced.

The City of New York is attempting to change its policies for properties where owners do not pay their property taxes or default on installment agreements. The current city policy calls for the "taking" of these properties in what is known as an "in rem" action within a year's time. In rem is a Latin word meaning "against the thing."

Proposals that must be approved by the City Council will include changing the current vesting procedure from borough-wide actions to tax class actions, and doing away with the current 20-month discretionary redemption period, giving owners merely four months before such vesting is final.

"That will be the stick to make sure they pay their taxes," said one official, who asked not to be identified.

And for property owners who have played games with installment agreements and hung onto their properties with the hopes the city would cut a better deal on back taxes and interest, the new policies make it clear it's time to pay up or give up.

Officials say they want every one of the back tax dollars and will be able to get that at lien sales. But as one official said, "There is no role for Cowboy Bob," so for now, no private investors will be able to buy tax liens.

Instead, liens are expected to be sold to financial institutions and other pre-qualified financiers. "The initial program will be through a securitized approach," explained Commissioner of Finance Joseph Lhota.

These lien holders will take the city out of the rocky collection and enforcement process and instead, the lien holders will collect the 18 percent interest now charged on back taxes themselves.

While Lhota said 95 percent of all city owners pay taxes on time, of the five percent that enter into in rem agreements, 90 percent of those pay up within four years.

Such lien sales are conducted in a number of large cities around the country, and even in many small towns and villages upstate.

Mayor Rudolf Giuliani said $72 million in liens will be sold in the first round.

The city will be looking for the full back taxes and interest to the date of sale.

This is the first administration to make a concerted effort to dispose of city-owned residential property, primarily through sales to pre-qualified neighborhood groups and pre-qualified individuals.

The documents state that commercial property, vacant land and residential properties with "obvious recoverable value" will be culled and "may be offered" in tax lien sales. That program, however, may not happen soon, officials confide. Right now, the Division of General Services sells commercial property outright at auction and the new policies do not appear to change that at this time.

Under the proposals, many of which still have to be approved by the City Council in laws that have not yet been completely drafted, the city will change the process from borough-wide vesting of all eligible properties to tax class vesting. "This gives us more flexibility, so you will see more targeted vesting," explained Commissioner Lhota.

It also will provide for a modified in rem procedure, under which Housing Preservation and Development (HPD) officials can choose to take over a property or not to take it over and sell it instead, depending on its economic viability.

The plan will also allow HPD to offer the properties without going through the Uniform Land Use Review Process, confided Deborah Wright, Commissioner of HPD, who hoped the Council members would understand the wisdom of quick intervention. "That's a big give-up and I don't want to downplay it... and it frightens some people," she said.

It currently costs the city an average of $2.2 million for each residential property it owns, while the buildings' average arrearage is only $36,000.

Wright said there are already some loan programs in place to help people with the buildings, but agreed "There is a need to increase the amount and we will work with the Council on that."

Buildings that are out of the redemption period now are expected to be sold outright, said Wright.

An early warning system will also be implemented with the help of neighborhood organizations and utilities, with the idea of identifying ownership at risk before they get into further financial trouble. City Council bills also create an intervention program to identify hazardous properties.

Bills considered to be too arbitrary by owners groups are being introduced in the City Council. "Flower pots on fire escapes are also not correlated with structural defects," complained Dan Margulies, executive director of the Community Housing Improvement Program (CHIP).

Intro. 609, known as the "Early Warning System," provides for the identification of residential buildings with two years of tax liens due and unpaid and certain violations, and provides for in rem action after three years. A companion bill, Intro. 616, deals with the identification of buildings with violations for hazardous conditions. They will be the subject of a hearing, this Thursday, November 9th at 10 a.m. in the City Hall Committee Room.

The city used to auction most of its properties, but during the Koch administration, they figured they could renovate the in rem properties using millions of dollars in newly available Federal block grants and then sell them for more money.

But the city never established a viable or speedy sales program and on July 1, 1993 owned 58,340 housing units. As of July 1st 1995, after implementing its Building Blocks program, it has reduced that number to 42,021 units in 4,406 buildings in all five boroughs.

Properties were supposed to be vested into city hands within a year of the initial borough filing. But in the late 1980's, so many owners could not pay their high property taxes many were in a queue to be taken over.

When Mayor Giuliani was elected and appointed Wright as Commissioner of HPD, she was astounded to discover she was in line to be responsible for an additional 8,000 buildings with about 40,000 apartments that were due to be vested. Many of these individuals had low-incomes and their tenants also paid low rents that could not cover costs of operating the apartments.

So quietly, the city stopped vesting most of the buildings and began working on policies designed to return the currently-owned buildings to private ownership.

The last big city vesting was in September of 1993, when 281 Queens properties passed to city hands. About 50 or 60 have been vested since that time, but within the next few months, sources say about 150 commercial properties in Queens, Brooklyn and Staten Island that have defaulted on in rein agreements and owe more than $2,000 will be taken over by the city. No properties in The Bronx or Manhattan fit that criteria.

Currently, it takes HPD an average of 19 years to dispose of each in rein building, and recent policies, including Neighborhood Entrepreneurs and Building Blocks, have begun to chip at the backlog. Under these programs, HPD has helped renovate apartments and return them to private management and eventually ownership.

The problem with these buildings, however, that the announcement by the Mayor last week did not address, is the reasons the property taxes were so high to begin with was that the income available to the building owner could not sustain the taxes.

Nor does the Mayor's policy address statutory and artificially low rents, high water and sewer bills, or the new looming issue of the costs of lead abatement. It also doesn't address the expected 2 percent increase in water charges when the new water and land conservation agreement comes into effect.

Michael Lappin, president of the Community Preservation Corp. that acts as a lender to many small owners said, "Conceptually, there is real merit to what they are trying to do. The one thing they are not locked into is the politics of holding it for the long term. It's an enormous drain on city resources. There are some decent private owners in these neighborhoods who frankly see the city stuff as their biggest problem."

While owners' groups also praised the Mayor and Commissioners for taking "bold" steps, they pointed to the underlying problems.

"From a long-term perspective, unless you deal with the underlying factors as to why these buildings ended up in rem in the first place, you are not going to be successful in the long term," said Joseph Strasburg, president of the Rent Stabilization Association, an owner's group. "We will find ourselves back in the same position again."

Agreed Margulies of CHIP, another owners' group, "Unfortunately none of the proposals address the fundamental problems that caused these buildings to go in rem in the first place. A lot of owners don't need counseling, they need tax relief and free-market rents. Unless they include those, the Mayor's proposals are only short-term remedies for the city."
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Title Annotation:New York, New York's property tax policies
Publication:Real Estate Weekly
Date:Nov 8, 1995
Previous Article:Commercial brokers: the true professionals of real estate.
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