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Tax Foreclosure & Tax Sales As A Redevelopment Tool

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THE TAX SALE LAW: AN OVERVIEW

SPECIAL TAX SALES

ACCELERATED FORECLOSURE AND OTHER POWERS AND OBLIGATIONS OF THIRD PARTY BUYERS

Tax foreclosure, particularly in municipalities where property values are low and many owners see no compelling reason to continue to pay taxes on vacant or substandard properties, is the means by which most abandoned properties fall into a municipality’s hands.  This section first provides a short overview of the tax foreclosure process under New Jersey law, and then discusses specific provisions of the law that target abandoned properties.

THE TAX SALE LAW: AN OVERVIEW
In New Jersey, as in other states, property owners are legally required to pay property taxes on their holdings, and to pay other municipal charges for which they may be liable such as sewer and water charges, special assessments, or liens for abating nuisances such as boarding or removing debris from the grounds of a property. All of these liens are known as priority liens, because they have priority under the law over other liens, such as mortgages and judgments.

If a property owner fails to make timely property tax payments, the property may be subject to tax foreclosure, either by the municipality or by a third party who has bought the tax lien from the municipality. The procedures that govern tax foreclosure are set down in the Tax Sale Law, N.J.S.A. 54:5-1 et seq. As with any governmental activity involving property rights, the process is not simple. The description below is designed to provide the reader with a brief overview of this procedure.

The first step in the process is the tax sale. In order to recoup the value of unpaid property taxes, the statute requires that each municipality hold an annual tax sale of properties in arrears on their property taxes. The municipality is not actually selling the properties, however, but the tax liens on the properties; in other words, the right to collect the back taxes from the owner, or, if unsuccessful in that effort, to foreclose on the property. Tax liens are also referred to as tax sale certificates.

Buyers appear at the tax sale and purchase the tax sale certificates by paying the back taxes to the municipality. If a bid made at the tax sale meets the legal requirements of the Tax Sale Law, the municipality must either sell the lien or outbid the bidderIf no one bids on a property, the municipality retains the lien or certificate. In distressed cities, the municipality often ends up holding a large number of tax sale certificates on properties, particularly abandoned properties or properties in areas where little or no market exists.

The property owner has the right to redeem the property by paying the taxes, along with penalties and interest due. Where the municipality holds the certificate, if the owner fails to redeem in six months, the municipality may initiate tax foreclosure proceedings against the property. Tax foreclosure takes place by filing a complaint in Superior Court listing the properties subject to tax foreclosure, providing notice to the property owner and any lien holder on the property, and publishing a notice of the action listing the properties involved, their owners of record, and the amount due, in a local newspaper. Since the tax foreclosure will wipe out the property interests of the private lien holders, the courts have held that municipalities have an affirmative duty to notify anyone who has a potential interest in the property. If the notice is deficient, even in minor details, the title that the city obtains after the foreclosure process may be defective and uninsurable.

The owner continues to have the right to redeem up to the date the court judgment is signed. After that date, redemption is permitted under very limited circumstances for three months, and under no circumstances thereafter as long as the municipality has carried out the process correctly.  If it has, it will now have clear title to the properties on which it has foreclosed. A private, third party buyer of a tax lien has the same rights as the municipality to foreclose, but, under the general provisions of the Tax Sale Law, must give the property owner two years to redeem before beginning the foreclosure process.  Where the property meets the criteria of an abandoned property, both the municipality and a tax lien buyer can start the foreclosure immediately after obtaining the tax sale or tax lien purchase with no waiting period.

The provisions summarized above apply to any property, abandoned or not, where the owner has failed to pay taxes when due. The Urban Redevelopment Act and the Abandoned Properties Rehabilitation Act made a number of modifications to the provisions of the Tax Sale Law dealing specifically with abandoned properties, including:

  • Creating a Special Tax Sale procedure for abandoned properties
  • Granting additional rights and imposing additional obligations on third party buyers of tax liens on abandoned properties, including accelerated foreclosure.

SPECIAL TAX SALES
New Jersey law requires all municipalities to offer the tax liens on tax delinquent properties to buyers at regular tax sales. This helps raise money for the municipal budget but can cause other problems, particularly with abandoned properties. Under the Tax Sale Law the municipality must sell the property to the highest bidder, regardless of the bidder’s qualifications or intentions. When the tax lien on an abandoned property is bought by an entity that does not move to foreclose, or lacks either the intention or the ability to reuse the property responsibly, the property is likely to further deteriorate, continuing to blight its surroundings and cause harm to its neighbors.

The Abandoned Properties Rehabilitation Act addresses this problem in two ways.  One is by authorizing  municipalities to hold special tax sales of abandoned properties as spelled out in N.J.S.A.55:19-101.  The other is by allowing buyers of tax sale certificates to initiate foreclosure on abandoned properties immediately rather than waiting the two-year period otherwise required, as well as giving them other rights.

A special tax sale is a tax sale, held separately from the general tax sale, in which the municipality may sell liens on properties that have been placed on the municipality’s abandoned property list. In contrast to the “all comers” approach of the general tax sale, the special tax sale is designed to ensure that tax liens on abandoned properties end up in the hands of entities that are actively committed to taking title to the properties and reusing them in ways consistent with the public interest. The law, loosely modeled after a law enacted by Maryland for the city of Baltimore, gives the municipality broad discretion to establish standards and procedures for special tax sales in order to achieve that goal.

(a) Set eligibility criteria for bidding at special tax sales.
The municipality may set a variety of qualifications and performance requirements, which it can use to limit who can bid at a special tax sale, including:

  • Requiring bidders to document their qualifications to rehabilitate or otherwise use the property consistent with the municipality’s plans and regulations

This can include documentation of the bidder’s prior successful rehabilitation or redevelopment activities, documentation of the qualifications of the bidder’s development team (contractor, architect, et al.), evidence of financial capability, or other relevant information.  The municipality can specify what its plans are for the properties, and require that the bidder’s qualifications be appropriate to carry out work consistent with those plans.

  • Requiring a commitment by the bidder to rehabilitate or otherwise reuse the property consistent with the municipality’s plans and regulations
Specific reuse commitments may be required as a condition of bidding. For example, in the case of a cluster of abandoned single family houses, the municipality could require the bidder to commit to rehabilitate the houses for sale to owner occupants. The municipality can also require the bidder to submit a timetable for action.
  • Requiring the bidder to take action to foreclose by a date certain

If the municipality requires prospective bidders to submit a timetable for rehabilitation or reuse of properties, it must be sensitive to the fact that the bidder must carry out the foreclosure process before beginning rehabilitation. That process adds a highly unpredictable element to the bidder’s timeframe for action.

The bidder is expected to use the accelerated foreclosure provisions of N.J.S.A.54:5-86, as amended by the Abandoned Properties Rehabilitation Act, to comply with any requirements imposed by the municipality under this language.

  • Establishing other criteria for bidding

The law provides blanket language permitting a municipality to set other requirements to ensure that the properties will be “reused in a manner consistent with the public interest.” This could include, for example, provisions to bar known “bad actors” from bidding, such as entities that had histories of repeated code violations on properties they already owned.

(b) Reduce minimum bid requirements. The general rule for tax sales is that the minimum bid must be the full amount of the taxes, interest and penalties owed on the property. The Abandoned Properties Rehabilitation Act permits a municipality to set a lower minimum bid for properties in the special tax sale, where the municipality believes that by so doing, it will better ensure that the properties are indeed reused in a manner consistent with the public interest. The rationale for this is that the full amount of taxes, interest and penalties on some properties may be so large relative to the cost of rehabilitation and the subsequent value of the property that by adding those costs to the cost of rehabilitation, the financial feasibility of the proposed reuse may be jeopardized. The law sets no limits on the amount that a municipality can reduce the minimum bid.

In the event a bidder buys a tax sale certificate for less than the full amount, the owner of the property must still pay the bidder the full amount owed in order to redeem. The bidder gets to keep the difference, since the municipality, by selling the certificate for less than the full amount, has waived its right to the additional amount paid by the owner.

(c) Combine properties into bid packages. When looking at properties eligible for special tax sale with an eye toward rehabilitation or redevelopment, the municipality may determine that some properties should be rehabilitated or reused as a package. To that end, the law permits the municipality to create bid packages containing more than one property. Once the municipality has designated a group of properties as constituting a package, the municipality may then:
  • Require bidders to place a single bid on the package as a whole
  • Reject any bids on individual properties contained in bid packages
This can be useful in a variety of situations. There may be five or six vacant single family homes on the same block, which should be rehabilitated at the same time in order to stabilize the block. For one entity to rehabilitate one house, while the others remain vacant, would be substantially less desirable, either for the block or for the city. Similarly, a number of vacant buildings may be located adjacent to vacant land already owned by the city, or owned by a CDC. In such cases, it is clearly in the public interest for the properties to be sold as a package to the same entity, rather than sold one by one, and risk ending up in the hands of more than one bidder. CDCs may want to request the municipality to package properties in special tax sales, in order to help them carry out their redevelopment goals for their neighborhoods.

These provisions make it clear that the law not only permits, but encourages, municipalities to tailor the provisions of a special tax sale to the qualifications and requirements of specific organizations, particularly CDCs, both capable and willing to carry out specific rehabilitation or reuse projects in the community. The planning of a special tax sale should be done cooperatively between the appropriate public officials and representatives of those organizations, to ensure that the outcome is most consistent with the public interest.

(d) Right of reverter. The municipality can sell liens subject to a right of reverter. A right of reverter provides that if the purchaser fails to carry out any of the commitments required as a condition of sale or misrepresents any of the qualifications required to be eligible to bid (see (a) above), the properties come back (revert) to the municipality. If the purchaser has not yet foreclosed, the tax liens revert to the municipality. If the purchaser has already foreclosed on the lien, then title to the property reverts to the municipality. Any money paid by the purchaser to buy the tax sale certificates is forfeit to the municipality.

While a right of reverter is, in theory, automatic, in practice some purchasers may be reluctant to surrender their deeds if the municipality determines that the right of reverter has been triggered. Municipal officials should work with legal counsel to frame language that places the municipality in the strongest possible position in the event it believes the exercise of this right is warranted. At the same time, the municipality should be careful that such language does not inadvertently prevent the purchaser from obtaining financing needed to carry out the rehabilitation or reuse project.

(e) Procedure for holding a special tax sale. A municipality that wants to conduct a special tax sale should follow these steps:

Step 1: At the time that the tax collector assembles a list of properties eligible for tax sale, he or she should identify any properties that are also on the municipal abandoned property list, and provide a list of those properties to the appropriate municipal official, such as the planning director or director of community development.

Step 2: That municipal official, in consultation with CDCs, developers, and other interested parties, should identify which of those properties are of potential interest to CDCs and developers, and therefore suitable for a special tax sale.


Step 3: For those properties, municipal officials, again in consultation with CDCs and other interested parties, should develop the conditions, requirements and bid packages that will be used for the special tax sale. The list of properties and the proposed conditions of the special tax sale should be presented to the municipal governing body.

Step 4: The governing body must adopt a resolution setting the time and place for the special tax sale, and setting forth the conditions of sale and the properties to be sold, including any properties that will be offered in bid packages rather than individually.

Special tax sales are subject to expedited notice requirements, limited to “a single advertisement published in a newspaper circulating in the municipality no less than four and no more than six weeks prior to the sale, along with notice to the property owner and any person or entity entitled to notice of foreclosure.” (N.J.S.A.54:5-26, as amended by P.L.2005, Chapter 118). Any special terms of sale, as described above, must be set forth in the notice.

Step 5: The special tax sale is conducted, and the tax sale certificates on the properties are sold. The special tax sale can be held on the same day as the municipality is holding its regular tax sale.

In the event two or more bidders meet the minimum qualifications and other requirements of the special tax sale, the municipality may designate an unsuccessful but qualified bidder as a backup purchaser. In the event that the successful bidder fails to carry out its obligations, and the tax sale certificates revert to the municipality, the municipality can immediately designate the backup entity as the winning bidder, and assign the tax sale certificates to that entity on the basis of its bid at the special tax sale. This provision is designed to help keep the rehabilitation or reuse process on track, by making it unnecessary for the municipality to either hold a new tax sale, or assign the certificates without imposing the qualifications and requirements of the special tax sale.

A provision of the Urban Redevelopment Act provides that in the event of a tax foreclosure of a property on the abandoned property list, redemption is not permitted unless the owner either (1) posts cash or a bond equal to the cost of remediating the conditions which led to the property being placed on the list; or (2) remedies the conditions in full (N.J.S.A.55:19-58[c]). Since the special tax sale involves only properties on the abandoned property list, this provision appears clearly to apply to those foreclosures as well.

The municipality can designate any municipal official to conduct tax sales. In most municipalities, tax sales are conducted by the tax collector, and in most cases, it is reasonable to have the tax collector, who is intimately familiar with the procedural requirements of tax sales, conduct the special tax sale. The tax collector, however, should work closely with the municipal official responsible for community development or redevelopment in designing and carrying out the special tax sale. The latter official should assist the tax collector to frame the bid criteria, and should be responsible for certifying the information provided by potential bidders to determine which entities are qualified to bid at the sale, since that information will fall outside the technical expertise of most tax collectors.

ACCELERATED FORECLOSURE AND OTHER POWERS AND OBLIGATIONS OF THIRD PARTY BUYERS OF TAX LIENS ON ABANDONED PROPERTIES.
The Abandoned Properties Rehabilitation Act gives important new powers to third party buyers of tax liens on abandoned properties. At the same time, it imposes certain obligations on buyers, if they want to avoid becoming subject to other provisions of the act.  Current or potential tax sale certificate buyers and municipal officials should be familiar with these powers and obligations.

(a) Accelerated foreclosure and right of entry. The Abandoned Properties
Rehabilitation Act amended N.J.S.A.54:5-86 to grant significant powers to third party tax lien buyers. The buyer of a tax sale certificate on an abandoned property, either at the time of tax sale or thereafter, may immediately file an action to foreclose on the property. The standard two year waiting period for foreclosure by a third party is eliminated with respect to abandoned properties. Moreover, while the property must meet the definition of abandoned property to be subject to the provisions of this section, it need not be on a municipal abandoned property list.

If the municipality has an abandoned property list, and the property is already on that list, it automatically meets the criterion for accelerated foreclosure. If not, the certificate holder should obtain a certification, affidavit or similar document from the municipal public officer that the property meets the definition of abandoned property. The law requires that the public officer, or tax collector, as appropriate provide a certificate holder in timely fashion with a certification that the property fulfills the definition of abandoned property (N.J.S.A.55:19-83[d]).

In addition to the right to accelerate the foreclosure, the tax lien holder also has the right, from the date that she purchased the tax sale certificate, to enter the property after written notice by certified mail to the owner, in order to make repairs or remedy harmful conditions (N.J.S.A. 54:5-86[c]). Although the statute does not specify a minimum period after giving notice before entering on the property, it is advisable to wait 10 days, the period specified in N.J.S.A. 55:19-56[b].

The conditions that the lien buyer may remedy are not limited to health and safety hazards, but include conditions that “materially reduce the value of the property.” The intent of this language is to give the lien buyer the ability to make repairs to conditions that are furthering the continued deterioration of the property, such as roof repairs to prevent water damage. It should not be constructed, however, to go so far as to include complete rehabilitation of the property, which should wait until the lien holder has obtained title. The tax lien holder can add any repair or nuisance abatement costs to the balance that the owner must pay in order to redeem the property (N.J.S.A.54:5-86[d]) by filing an affidavit with the municipal tax collector.

Any tax lien holder making repairs or abating nuisance conditions on an abandoned property should maintain detailed and carefully documented records of all costs incurred in the process, in order to ensure that the costs will indeed be reimbursed in the event of redemption by the owner and that they will withstand a potential challenge by the owner. The lien holder should also make sure that her insurance coverage fully covers her activities.

(b) Other rights and obligations of tax lien holders. The law provides strong protection for third party holders of tax liens on abandoned properties. As long as the tax lien holder has carried out certain obligations, a property is not considered abandoned property for purposes of the various legal remedies included in the Abandoned Properties Rehabilitation Act (N.J.S.A. 55:19-93[a]). In order for the property not to be considered abandoned, the tax lien holder must:
  • Pay all municipal taxes and liens on the property in the tax year when due,
  • Initiate foreclosure proceedings within six months after the property is eligible for foreclosure, and
  • Diligently pursue foreclosure proceedings in a timely fashion thereafter.
If the certificate holder has not carried out any or all of these obligations, and the property appears on the municipality’s abandoned property list, the lien holder can have the property removed from the list by paying all taxes and liens due within 30 days. If the lienholder does not commence foreclosure, however, within six months from the date the property initially appeared on the list, the property is automatically restored to the list, and once restored to the list, remains there.

BIDDING DOWN TAX LIENS

Bidding for tax liens under the New Jersey Tax follows a procedure known as ‘bidding down’ the lien. Since the amount that the bidder must pay for the lien is fixed by law, bidders compete on the basis of the interest rate the property owner is charged, if and when the owner redeems the property. The initial bid is for the maximum interest rate permitted by law (generally 18 percent per annum). If the initial bidder is successful, when the property owner redeems, he or she will have to pay interest at 18 percent on the back taxes due. Each subsequent bidder, however, bids a lower interest rate; in other words, the bidder indicates that he or she is willing to accept repayment from the owner at a lower interest rate than the maximum permitted by law. The bidder offering the lowest interest rate wins the auction.

If the bidders bid the interest rate on a particular lien down to zero, and two or more bidders are still competing for the tax lien, the bidders then compete by offering the municipality a premium, an amount over and above the actual amount owed on the lien. The bidder offering the highest premium wins the auction.

The premium, however, does not actually belong to the municipality. It is held by the municipality pending redemption of the property by the owner, at which time it is returned to the bidder (the municipality retains the interest, however). If the property is not redeemed, the premium is forfeit by the bidder, and is retained by the municipality.

 Under Sec. 30.1 of the Tax Sale Law, if a municipality wants to gain control of a tax lien certificate on a property for which private parties are also bidding, the municipality must bid against those parties as if it were another private bidder, as described above.

 
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