Mortgage

Debtors want property tax reduction, too. Here is the way it might be performed

Some owners of residential and business properties are facing difficulties due to the impact of the coronavirus on the economy. Homeowners may have lost their jobs, been furloughed, or had their income slashed and owners of commercial properties may have tenants that were ordered to be closed or suffered a loss of income and are unable to pay rent.

Nevertheless, there are ongoing expenses to operate the property while tenants may not be able to pay rent. Mortgage payments are due, as are property taxes; and failure to pay those property taxes in a timely manner may cause significant problems for owners. Mortgage documents often provide that a property tax delinquency constitutes a default, which may (depending on the document and circumstances) permit the mortgage holder to accelerate the outstanding balance or pay the tax and add it to the mortgage debt.

Property taxes, paid by residential and business property owners, are the lifeblood of cities and counties around the country paying for schools, police, fire, sanitation, and other services. They are also a more stable source of revenue for localities as they are usually less subject to economic fluctuations that make sales and income taxes more volatile. In this current economic climate, tenants may face eviction because they can’t pay their rent since their businesses are closed or open with minimal operations, and landlords’ expenses, including taxes, utilities, and mortgage payments, remain due even if rents aren’t being collected.

Unpaid real estate taxes, in almost all jurisdictions, are a first priority lien on the property. As noted, failure to pay real estate taxes in a timely fashion may put an owner in default and in breach of agreements for loans or with suppliers or creditors. This can set off a chain reaction of defaults that could make recovery after the current crisis subsides impossible.

Many lenders are working with their borrowers to ease some requirements or extend time to make payments. However, this requires each borrower to engage the mortgage holder or servicer and have discussions individually. Getting in touch with a servicer may not be easy; and having to negotiate each loan separately is difficult and time consuming.

Potentially, states and localities could extend payment due dates or defer the imposition of liens for taxes in recognition of the serious and complicated consequences that will result from having property taxes become delinquent, even if reasonable interest is charged for late payment. Governments may determine that it is preferable to keep businesses operating and reduce collateral consequences of defaulting mortgagors due to failures to pay property taxes on time. In addition, they may also conclude that flexibility on payment plans that keep taxpayers current is a preferable and more comprehensive way of dealing with what all hope is a short-term crisis. But, the inherent unpredictability of the pandemic and the resulting economic downturn may affect such decisions.

Further, many taxing jurisdictions are facing the real prospect of a cash flow crunch themselves and will need to review the property tax relief they offer in the context of their overall economic situation. If other revenue streams are not and will not be available, either directly or by borrowing, when property tax payments would be deferred, they may face an impermissible deficit situation. The federal and state governments may need to step in and provide temporary relief either by grants or by low or no interest loans to the localities to see them through their cash flow issues. To help, the federal government included a limited liquidity relief program in the CARES Act, allowing state and local governments to borrow in the municipal market or from banks to cover the cash flow needs for the period of tax deferral. Under certain conditions, this might be done on a tax-exempt basis.

Property tax delinquencies generally incur high interest or penalty rates. In New York the interest on unpaid property tax is 18%; in some other jurisdictions the rate is 1% per month or 12% annually (Seattle) and some at 10% (Los Angeles) These rates are more than interest rates charged for mortgages or other loans and twice as much as the average rate being paid on municipal borrowings of about 5%. If the interest rate on property tax delinquencies is set at one or two percent higher than the amount of interest paid on whatever municipal debt is needed to keep cash flowing, a municipality will be made whole while providing taxpayers some breathing space to get back to normalcy.

Addressing these concerns, the New York City Council recently passed two bills granting relief on interest for certain property owners affected by COVID-19. The first bill, Int. 1964, reduces interest rates on late property tax payments for certain commercial properties assessed over $250,000. The usual 18% interest rate for owners who do not make the July 1 deadline will be reduced to 7.5% for eligible owners who can prove they’ve lost income due to COVID-19 and who pay their taxes by Oct. 15. The second bill, Int. 1974, eliminates interest rates for certain residential homeowners. They must demonstrate COVID-19-related impacts and their enrollment in a deferral program with the Department of Finance with delayed payments due July 1 to Sept. 30, or that their properties are assessed below $250,000 and they have household income of less than $150,000.

In sum, the difficulties that taxpayers are facing due to COVID-19 put pressure on owners and tenants as well as the cities, towns and localities where their properties are located. It is in everyone’s interest to try to get back to as close to normal as possible after this crisis passes. There are substantial costs involved in defaulting a mortgage and instituting foreclosure proceedings. By providing flexibility for property tax payments localities can help keep local businesses going and maintain their tax base for the future.

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