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Owners denounce NYC tax collection plan.

Real estate owners and attorneys loudly criticized New York City's newest plan to fund its coffers by going after owners personally for delinquent real estate taxes.

The move is one method the Department of Finance Commissioner, Carol O'Cleireacain is examining to collect large sums owed on real property tax bills. Collections are lagging and the city's in rem process stretches out payments.

Sources said the department is obviously going to go after the owners who owe the most first and that steers them right to the top delinquents of Class IV properties (see list p. 00). Owners in bankruptcy will not be at risk now.

The city is permitted to seek an in personam judgement by the Real Property Transfer Laws section 926 which authorizes the county to sell at auction personal possessions to satisfy real property taxes. The section provides that under limited circumstances, there is personal liability for city property taxes and this includes corporations which do business in the city. The law also extends beyond the county where the original property is located and acts as any other personal judgement.

"In personam is not limited to cash," explained William K. Block, a certiorari attorney in sole practice, "but runs to the typewriters in the central office to the cars driven to manage the properties and theoretically to pieces of real estate owned by the same entity."

Stephen Anfang, an owner and developer and founder of Collect, which is seeking to have the city sell tax liens to collect the monies swiftly, was adamant about his objections to the idea.

"That's ridiculous," he said. "Somebody isn't thinking clearly with a business mentality. That's one good way of scaring every developer left in New York City out of the city."

Anfang believes such a plan could create more chaos between the developers and the city." It's one more stupid idea to make sure this city stays in the graveyard," he said.

"It's a little crazy," agreed Jeff Gural, president of Newmark & Co., and co-chair of the Property Tax Fairness Coalition. "I can't imagine that you can (go after people personally)." Gural warned that if Department of Finance Commissioner Carol O'Cleireacain was successful, "It would be one more reason not to own real estate in New York and no individual would want to own real estate in New York."

The idea has been floating around city hall, since 1985 said one official who asked not to be quoted. "In good times the city doesn't look for ways to raise revenues, but in bad times they are looking for everything they can," the official said.

The city needs the money to begin generating interest and to keep its cash flow going. The top 50 delinquents alone account for $55 million of the $560 million owed by delinquent taxpayers since July 1.

If they are going to do this instead of taking the building, said Steven Spinola, president of the Real Estate Board of New York, it is a serious policy change that is "truly outrageous."

"It would require or force people to go into bankruptcy," he said, "and tell people not to own property. It's a terrible story, a terrible story, and a terrible policy."

Block, who was formerly Deputy Commissioner of Real Property for the Department of Finance, said the issue of in personam was raised in the past when the market was good. "A decision was made not to use it because it sends a message that if you invest in New York and it goes sour," he said, "you will not only lose your investment but could lose bank accounts or other businesses -- and that's a profoundly negative position to the business community. The idea of using in personam at a time when the market is going down, is counterproductive and disastrous. It is ludicrous to adopt that position now when you need people to come in and speculate."

Hubert J. Brandt, of Peter H. & Hubert J. Brandt, a certiorari expert, said he would be opposed to the plan. "Is the gamble of owning real estate in the City of New York - if you want to sink capital in and make an unsuccessful venture - do you put your home, your car and your children's bread up at risk?," Brandt said. "It's bad enough that the city takes the building," he added.

Dan Margulies, executive director of the Community Housing Improvement Program (CHIP), said with some rare exceptions of people who are simply withholding taxes, the delinquencies are not as Commissioner O'Cleireacain suggests.

"They are not just loans that owners are taking out voluntarily at 18 percent interest," Margulies agreed. "The majority have cash flow problems and are delinquent because they are over assessed. They haven't got the cash to support the assessment. You only have to look at the sale of 1540 Broadway for half the amount of the mortgage to understand the buildings are only worth half of what they once were and are not spinning off the revenue."

Block also believes O'Cleireacain is wrong in her belief that developers are intentionally using the city as a bank. "No one uses a bank that charges 18 percent interest which is 11 percent above prime," he said. If you went back 10-years, he said, when the interest rate was set by statute and was 5 or 6 percent, there was a perception people could borrow cheaper than at the bank, and made money by using the city as a bank. Now, he said, the interest rate is set six points above prime.

The city's interest rate is likely to fall dramatically when the City Council officially sets it in June. In the past, city officials were content collecting $40 million plus in interest on delinquent taxes every year. That number is also likely to fall once the interest rate is set, probably somewhere around 12 percent, which will also make the city a competitive lender once again. This could mean even more owners will allow their tax payments to lag.

"Banks are making it difficult for people to get lines of credit," Block added, "so you have very reputable people, who historically would be able to access the money, but cannot."

Stephen Mann, chairman of the Clifford Companies which helped effectuate a workout on the Joseph Neumann properties, said most of the largest properties are owned by a single purpose entity and are either a partnership or corporation. "The reason they are in default is because people have no money," he said. He called O'Cleireacain's plan unrealistic and a waste of money.

"There is no point in the city spending money to go after owners personally because they are on the list because they don't have the money," Mann added.

Block believes this policy would only exacerbate the recessionary downward spiral. "If I have a rental property and I have a cash flow expense and one of the expenses I don't make is real estate taxes, and you swoop in and take my bank account, I can't pay for fuel," he said. When I am not providing heat required by my commercial leases so my tenants can, at a minimum, refuse to pay rent or go elsewhere.

Legislative Body

Should Decide

There are court decisions which say the municipality must make an election to use either in rem or in personam. "The In rem notice says there will be no personal judgement," Block said. "The city can't do both and must make an election as to which one they will do."

The city could not go building by building, Block said, because that would raise the issue of unequal enforcement of the law. "If they try to do it by class, they must define the class and have a legislative body define the class," he explained. The issue of disparate treatment by class was litigated by the city when they were changing to quarterly or half year billing and the court said it was alright to do so when there was a rational basis.

But having the administrator, such as the Commissioner, make the determination would probably not hold up in court, Block predicts, because the rational basis would not have been determined by a legislative body such as the City Council. That would involve City Council hearings as well as the Mayor's signature and would take some months to implement, if at all. Sources in the Department of Finance said the law department had advised O'Cleireacain that she could implement this without anyone else. "They will open themselves up to litigation over the issue," Block predicts.

Why Don't Banks

Pay the Taxes?

Major commercial banks have the ability to administer the tax liability of both owned and leased properties - as well as real estate loans - because of the sheer volume which makes it efficient to run departments. One such bank is the Chemical/Manufacturer Hanover combination which devotes a large department to its real estate tax liabilities. Other small banks do not have this expertise or only one person is in charge of the taxes and does not have the time or ability to review the tax liability.

Still, many of the top delinquent have mortgages which are held by large banks and, Mann said, it seems to make poor business sense for the banks not to step in and pay up the taxes instead of allowing the interest to accumulate at 18 percent.

Stuart M. Saft, a partner and head of the real estate department at Wolf Haldenstein Adler Freeman & Herz said banks do not pay because they are afraid of adding value to the building. "It expedites their ability to get it out of the bankruptcy court," he said. Saft represents CitySpire, which is the top delinquent, owing $10.95 million. The owner of the unsold condominium units is Bruce Eichner, who is in bankruptcy and would be untouched by the new Finance Department policy. Saft believes the city should get the money any way they can and did not see a reason why they should not go after owners personally.

All the large buildings have mortgages, Mann noted, "But the banks hate to write a check when they are in the middle of the workout," he agreed, "even though its irrational." He said ultimately the banks will pay when the owner gives the deed to the bank.

"You can't force somebody to pay the taxes," one banker said. "They are in default on the loan and you can force them into a position to foreclose and accelerate the loan, but you cannot for non-payment of taxes. You have to do it in a gentle way."

While New York does not take over the property for some years after taxes are overdue, in other jurisdictions, such as St. Louis, "if a bill isn't paid in six months they take the property," the banker added.

Anfang's Collect group has been trying to have the city to hold tax lien sales, such as held by Chicago, to speed up the collection of taxes but his efforts have been basically stonewalled by the city.
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Title Annotation:real estate owners; New York City plan for delinquent real estate taxes
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Mar 11, 1992
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