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Autumn 1993
City Journal Autumn 1993.
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  C ity Voices

Back Taxes for Sale
Kenneth Silber
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New York’s continuing recession has weakened the real estate market, hindering the city’s ability to collect property taxes. The rate of delinquency, which declined to less than 2 percent in 1987, is now close to 4 percent; city officials estimate that New York residents fail to pay more than $300 million per year in property taxes on time.

City policies further compound this expense. When a property owner fails to pay taxes on time, the city invokes collection procedures, charging interest on the delinquent taxes at an 18 percent annual rate. If the city still cannot collect, it seizes the property in rem, taking it off the tax rolls and incurring the costs of maintenance and rehabilitation.

The Office of Property Management of the Department of Housing Preservation and Development (HPD) maintains almost 30,000 occupied residential and commercial units in apartment buildings, more than 1,300 occupied units in one- and two-family houses, and thousands of vacant apartments. The city plans to spend $1.6 billion during the next decade on the maintenance, rehabilitation, and eventual disposition of in rem properties. When the properties leave city hands, they are usually turned over to nonprofit organizations, which pay no property taxes.

New York City could both reduce its expenditures and improve its housing stock by adopting an approach many other local governments use for dealing with delinquent property taxes: selling liens to private investors.

The selling of tax liens would in effect privatize the collection of back taxes. The city would hold an auction to determine the interest rate attached to a lien. Bidding would open at a high rate—say, 18 percent—which would be bid down. The purchaser would pay the city the face value of the lien—the entire debt owed the city on a property, including taxes, interest previously accrued, and water and sewer bills. It would be his responsibility to collect the money owed, plus the interest that would serve as his profit on the investment, from the delinquent taxpayer. If his collection efforts failed, the purchaser of the lien would take ownership of the property.

By selling liens, New York City would receive a portion of the money owed it in a timely fashion and would reduce the number of properties entering the expensive and often poorly maintained in rem system. In Chicago, the Cook County government was able to sell about 30 percent of the liens it offered at its annual auction in early 1993, raising $76 million. Marc Wurzel, an aide to Republican City Councilman Fred Cerullo of Staten Island, estimates that New York could sell some $70 million worth of liens each year and save another $40 million in annual HPD expenses by keeping property in private hands.

In June 1993, Cerullo and his fellow council Republicans proposed that a lien sale be included as part of the city’s fiscal 1994 budget. A city law authorizes such sales, though it limits the interest rate to 12 percent. The Dinkins administration and council Democrats blocked the plan.

The city’s budget for fiscal 1994 does include an administration proposal that superficially resembles a lien sale and is intended to address the fiscal gap caused by rising property tax delinquencies. Under the deal, which has not yet been finalized, a subsidiary of Chemical Bank would pay $215 million in exchange for a share of the revenues received by the city in future tax collections. The proposal was strongly criticized by state fiscal monitors as a form of borrowing against uncertain revenues. Under the plan the city would remain the owner of the liens and retain the responsibility of collecting the taxes or foreclosing upon delinquent taxpayers. By contrast, revenues generated through a lien sale would belong to the city, free and clear.

Administration officials oppose lien sales on several grounds. They argue that many in rem properties are economically unviable and therefore would fail to attract private investors. Yet the city’s own practices contribute to this lack of viability. Under current arrangements, properties often deteriorate while the city is engaged in lengthy collection procedures against delinquent owners. A lien sale program would help prevent such deterioration by keeping properties in private hands and by making it harder for tax evaders to engage in delaying tactics. Since private lien holders, unlike city employees, would have a direct financial interest in collecting back taxes, they would likely do so more effectively.

Another objection is that the city would lose revenues by forgoing interest income on the debts that eventually are repaid. But the city loses both interest and principal on those buildings that it takes over. If it relies on revenues from such interest, the municipal government is, in effect, acting as a bank for delinquent taxpayers—a role carrying risks and administrative costs that almost certainly outweigh the benefits.

The administration also argues that lien sales might lead to increased evictions of tenants by new owners. While there is something to this argument, tenants are not well-served by the current process, in which landlords, prior to abandoning buildings, allow them to fall into disrepair while still seeking to collect rents. Nor do tenants necessarily benefit from being conscripted into the in rem system, in which buildings are often poorly maintained.

Safeguards could be introduced to minimize any dislocations that might be caused by lien sales. The proposal by the City Council Republicans, for example, would allow owner-occupants of homes and condominiums to apply for an exemption from the lien sale procedure. It also would require a two-year waiting period before a lien on a residential property is sold (as opposed to one year for a commercial property) and repeated notification of delinquent taxpayers prior to such transactions.

New York’s reluctance to engage in lien sales stands in marked contrast with recent innovations in Jersey City. There, Mayor Bret Schundler has set up a program in which municipal claims on properties are “bundled” and sold to institutional investors. As Schundler explains in a City Journal interview elsewhere in this issue, the practice takes advantage of financial institutions’ already existing collection capabilities and allows Jersey City to sell liens that otherwise would find no buyer.

If New York City began selling tax liens, it would find a group of investors eager to enter the market. Citizens to Collect Real Estate Debts Owed New York City, an organization headed by real estate executive Stephen Anfang and consisting of investors who are interestcd in buying liens, has lobbied the city since 1991 to allow such deals. The city should do so, both to increase its property tax revenues and to stem the growth of the costly in rem system.

 

 


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