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Delinquent Property Taxes
Real estate owners with delinquent property taxes face many issues, though there are solutions for owners who take the proper steps.
First of all, many owners are surprised to learn that the government really has first lien position on their property, even though they have a bank loan that currently sits in first lien. Lien position refers to which lenders/debtors get paid off first, ie in which order, in the case of a sale, refinance or forced sale via foreclosure. So it goes without saying that banks and debtors want to be in the first lien position to lower their risk and to ensure they will get all of the capital back.
However, the government always supersedes any agreement that owners have with a creditor. For example, in the case of foreclosure, any delinquent property taxes get paid off first, before the bank loan does; again, despite the agreement between the owner and bank. In addition, if the owner is current with their bank, yet is delinquent on their property taxes, the government can force the owners into foreclosure to collect on the delinquent property taxes.
This is why banks check title to see if there are any delinquent property tax (or other liens on the property) and why on the residential side so many banks force the borrower to set up and pay escrow accounts for their taxes (and insurance). The bank wants control of, and wants to make sure the borrower is current with their real estate taxes; to maintain their lien position to protect their capital.
A forced sale from the government, due to delinquent real estate taxes, creates even more issues for the bank. The properties often become neglected and if the borrower was granted a high leverage loan to begin with, it's very likely the lender will be underwater, ie the loan amount is higher than the properties value. This coupled with the outstanding balance of the property taxes can result in a substantial lose of capital for the bank.
Delinquent Property Tax
Owners with existing deliquant real easte taxes face some unique challenges, especially on the commercial financing side of the equation. Typically, the borrower will not be able to refinance their existing loan until the delinquent property taxes have been paid off... On the residential side many lenders have allowed the borrower to "roll" the overdue taxes into the new loan, but virtually no commercial lenders will permit this. The borrower is expected to pay it off with cash. And many naks will not like it if the borrower has been late on their taxes, which will eliminate an offering of financing. For example SBA loans, most conventional loans and B & I USDA loans will not allow the borrower to include the delinquent real estate taxes into the proposed loan and the fact that the owner has been late eliminates their eligibility of financing with these programs.
One of the more reliable yet more expensive solution for owners is to use a commercial bridge loan to refinance the taxes with. Most bridge lenders do not care what the use of proceeds are, as long as the loan meets their loan to value requirements; so the borrower can roll the delinquent taxes into the bridge loan.
One other point worth mentioning here is that owners should look at their delinquent taxes from a perspective of being over assessed. It is estimated that 60%of all property owners are overassessed and qualify for a real estate tax reduction. Most home owners can save between $300 - $2,000 per year while commercial owners often save tens of thousands of dollars per year (these savings go on year after year). In addition, owners that can show over payment in previous years are eligible for a refund... Which could be used to pay off all or a portion of the delinquent property taxes.
More info on property tax appeal
More info on commercial bridge loans
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