Delinquent Real Estate Taxes
A commercial real estate portfolio could incur delinquent real estate taxes if the bank is not escrowing. Also, collateral may be lost due to foreclosure caused by nonpayment of real estate taxes.
Tax collectors for city and county governments generally sell their real estate tax receivables to third parties who purchase them for interest benefits. In some cases, the written notice may go to the wrong address. This causes lenders to lose their collateral to real estate foreclosure due to delays in responding to the written notice. Lenders should have a central document system to record real estate tax information. In addition, information about the loan, including interest rate, borrower, etc. should be documented. The tax information should be recorded and include the property parcel ID number; address, city, state, zip code; name, address, email and phone number of the tax collector; date on which real estate bills are mailed to property owners, and the number of days allowed before becoming delinquent with a penalty.
Many banks are now using third party tax monitoring vendors. Vendors generally limit their liability. Vendors should be thoroughly checked out and have knowledge of CRE monitoring, provide service nationally, have a strong financial position and history of honoring obligations. CRE lenders need to feel confident they will be notified prior to real estate foreclosure when taxes are paid.
Lenders should consider the following safeguards against foreclosure risk:
- When conducting loan underwriting, review the payment history of real estate taxes. If they have been late or delinquent, it may give one insight to the future.
- Due diligence should be performed prior to loan closing, during an annual term review and when loans are modified, renewed, or extended.
- There should be a review process in place when notified by government authorities of delinquent taxes. A review process is also necessary during the loan workout process and before or after foreclosure when the loan is transferred to OREO.
It is also a good idea to ensure that loan documents allow for advancing funds for delinquent real estate taxes and add that amount to the note. When delinquent receivables go to auction additional charges are incurred. After auction, a tax certificate is issued providing the tax lien holder with evidence of ownership and carries foreclosure rights. The tax lien holder typically can wait up to three years before initiating foreclosure. The lender can redeem the tax certificate at any time with payment to the tax collector, not the lien holder.
In summary, it is important for banks and lenders to be proactive and diligent about on-going monitoring of CRE delinquent real estate taxes either through internal measures or with a third party vendor to minimize potential exposure.