How are Delinquent Taxes handled/accounted for on NPN 1sts

Question

Hi guys, I was hoping at add a few notes to my LLC, and I had a quick question on Delinquent Property taxes on a note. In terms of analysis/due dilligence, do you account the delinquent taxes in your CLTV when analyzing notes since you will most likely be exiting through the property?

Second, do you ever reinstate delinquent taxes on the property? Also, is it possible to modify a payment plan for the delinquent taxes?

Thanks for your input

Second, do you ever reinstate delinquent taxes on the property? Also, is it possible to modify a payment plan for the delinquent taxes?

Thanks for your input

Dion DePaoli · Answer

That clears up what you are trying to understand.  The rules on past due taxes netting from sale proceeds is state and county specific.  Some locations will allow the past due to remain as long as no lien is present and others will require the mortgagee to cure post sale.  Regardless of a winning third party bidder.  Off the top of my head I can't think of situations where a tax lien would survive but I would have to go look at some tax deeds as those may survive until redemption.  (we do not generally play "chicken" with taxes)As a mortgagee you are not obligated to advances the taxes at all.  The negative consequences of that approach is the delinquent taxes can turn into a tax lien or tax deed and eventually foreclose your lien out.   Generally speaking, as I mentioned before, it is a good idea to deal with tax liability head on.  Bear in mind that last year's delinquent taxes may not pose a threat of turning into a lien or deed for another year or two depending on the state and county of the subject property.  Even after a lien is created there is still time prior to a tax foreclosure.  Tax deeds are a little different in that they are the result of a tax foreclosure but allow for a period of time to redeem.  Considering an "average" property with a non performing mortgage/deed of trust, you will more than likely end up paying the taxes sooner or later to complete disposition.  Properties that are in a little rougher shape may find RE investors willing to take on that liability usually for a reduction in price.  Primary buyers, not so much.As a mortgagee, taxes are advances and recoverable by way of the foreclosure, provided the advance is made and included into the total due of the borrower.  This allows the mortgagee the chance to recover and also increases the potential deficiency of the borrower in states where it is legal to pursue.  For this reason, where it makes sense, taxes are typically advanced prior to auction.  Where it doesn't make sense is on lower value property.  The value of the property may limit the amount of recoverable advances.  So mortgagees will limit their capital exposure in general.  In a real property setting all things are negotiable but most buyers will want the Seller to provide clear title which means curing any tax liens or deeds outstanding.  Typically the current tax year liability is pro rated from the Seller.  All that said, the two parties can agree to it however they so choose.

Dion DePaoli · Answer

Arthur,

I read what you are saying but I don't hear what you mean.  The manner in which you are phrasing the question is over complicated and attempting to use a bunch of jargon which only confuses the simplicity of the idea.  Taxes are not a "Lien" until such time as a tax lien or tax deed is created.   When they become a lien or deed they have super status which means they are superior to any other lien.  Which is unlike most other liens.  That is also why you should not be a fan of them.  (I am grouping tax deeds in here with tax liens they are similar but have differences.  Tax deeds vary on rights to redeem.  Not all states are lien states.)

Are taxes due a part of the consideration of buying a loan?  Of course.  Are taxes treated like another normal lien?  No.  They are not like other liens.  See above.How does one treat taxes in the exit strategies?  1.  REO = negotiable between Buyer and Seller often Buyer demands Seller to cure.2.  Paid in Full = Not the mortgagee's problem.3.  Short Paid = The above two apply.4.  Sold at Auction = Not the mortgagee's problem."Incorporating taxes into the equity of the property"?  - Do you mean pay the taxes and increase your cost basis?  Any cost or expense will do this and taxes are certainly one of them.

If I was a betting man, I would guess you are looking at some of those FCI loans you mentioned in another thread and have found the taxes are sky high.  Large amounts of back taxes drive down the value of a loan because in most cases the Mortgagee/Investor is going to have to advance those which can eat into the potential recovery from the property in an NPN.  Resolving a loan on a $100k property with $2k in taxes is better than $20k in taxes.  It is best to deal with taxes head on.  There is no real way to circumvent tax liability as a Mortgagee.  If tax liens or deeds are present, that is sort of in your face deal with those now or loose the property altogether.

Mike Hartzog · Answer

Regarding the tax payment plan, I have a borrower who was delinquent on taxes and was able to work with the county and establish a payment plan to bring the taxes current.  I think Dion is correct that this kind of arrangement is not common.  My experience with tax authorities is that their approach is rather draconian in nature.

I suspect, however, that you may be referring to tax escrow payments?

Dion DePaoli · Answer

Taxes do not increase or decrease a loan's CLTV unless the loan is modified. For the record "CLTV" stands for "Combined Loan To Value" which is specifically the sum of all "loans" secured by the property divided by the property value.

Paying for property taxes is considered an "Advance" that is, paid on behalf of the borrower. Through the loan documents the Mortgagee is given a right to advance on behalf of the borrower and recover those advances. That advance is a separate account apart from the balance of the loan. The only way to merge those advance balances with the loan balance is through a modification of the loan. At that point it would be a CLTV increase because the actual loan balance increased.

So it looks like you are misusing the term "CLTV" perhaps to be something related to the amount of capital invested as a ratio of the property value. That is fine but that is not a "C"LTV that would be "I" for investment or "C" for capital investment, etc. The common reference is ITV.

Taxes do not get "reinstated". Loans get reinstated because they fall into default. Reinstatement is remedy of a default.

Tax payment plan? To who? A mortgagee can make the advances to protect their interest and create a payment plan with the borrower to pay back those advances. A mortgagee can not typically make a payment plan with the county. County Tax Collectors do not usually do such things where the plan will stay any legal rights the county has to sell off the taxes owed in a certificate or deed. The entire process of disposing of owed taxes is much like it's own payment plan - cheap interest and short term to redeem.

Arthur Mayer · Answer

@Dion DePaoli

Thanks for your input. It was not my intention to try to use a bunch of jargon and over complicate the question. I was trying to understand the exit strategies in place with delinquent taxes. I understand delinquent taxes are not liens, but I was trying to assure my assumptions that in the event of foreclosure, those delinquent taxes would have to be satisfied in the sale of the property similar to a 1st lien would be satisfied before a 2nd lien would be considered.

Maybe I used the wrong terminology "reinstate," as you  mention, but as a viable strategy, do some investors "advance" the taxes owed contingent on their exit strategy (i.e. hold property for rental purposes).

This is what I am trying to understand better.  Hope this clarifies the question.

Arthur Mayer · Answer

@Mike Hartzog

Correct. I was wondering if taxes get treated in the analysis the same way you would treat a priority lien, and if they are treated similar in terms of exit strategies and incorporating delinquent taxes to the equity of the property in the event you have to exit through the property.

How are Delinquent Taxes handled/accounted for on NPN 1sts

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