A lender’s priority in mortgaged commercial property can evaporate when the owner fails to pay property taxes. While a lender can preserve its mortgage interest in the property by insuring payment of the property taxes prior to a tax deed being given to a tax sale purchaser, it becomes progressively more expensive to preserve the lender’s interest. This article will go through the tax sale procedure in Indiana, review the notices that must be given to the property owner and the mortgage holder, and detail the timing and payment amounts that may be necessary to preserve the lender’s priority.
The Tax Sale Statutes – Ind. Code 6-1.1-24-1 et. seq.
The Indiana laws detailing how, when and where tax sales are held are contained in the Indiana Code starting at Ind. Code 6-1.1-21-1. That section states that the Treasurer of each county has a duty to certify to the county Auditor on or before June 30th of any given year any property taxes that are “delinquent”. Delinquent is defined in Ind. Code 6-1.1-37-10 as taxes not paid when due (normally May 10th (a “spring installment”) and November 10th (a “fall installment”)). Arguably that could mean that a property could be sold at tax sale for a single delinquent payment – even including the spring installment of the year that a tax sale is held. In practice however, most Indiana tax sales only seek to collect delinquent payments from previous years. A survey of Marion, Boone, Hamilton, and Vanderburgh counties, as well as most of the other counties serviced by SRI (more on that below) generally finds that a property will not be sold at tax sale until three (3) property tax installments are missed without payment arrangements being made. These installments are usually the full year prior to a fall tax sale, along with the spring installment due the year of the tax sale[1].
The Sale Process[2]
Although there are 92 Indiana counties, the vast majority of them (85 according to their representative) utilize SRI Services Company to handle their tax sales. A list of these counties, along with their 2017 sale dates, is included at the end of this article. These counties include, among others, Hamilton, Hancock, Hendricks, Johnson and Shelby counties in central Indiana (but not Marion or Boone counties). SRI states that it relies upon the county Treasurers to supply the list of properties that have delinquent property taxes according to statute.
Once the list is certified, the statutes require the Treasurer to prepare a Notice setting forth the properties to be sold and the amounts due (I.C. 6-1.1-24-2). The list includes the property owner’s name and the address of the property. Importantly, a mortgage holder may request a copy of this list from the county auditor, although there is a cost involved (6-1.1-24-3). The amounts due, in addition to the taxes and penalties owed, can include postage and publication costs, as well as sale costs (referred to in this article as the “Minimum Bid”). In Marion County the 2017 tax sale costs for each property were $450.00.
The Notice also sets forth the amount that it will cost a taxpayer and/or a mortgage holder to redeem a property if it goes through a tax sale. These amounts are:
- 110% of the amount of the Minimum Bid if the property is redeemed within six (6) months of the date of the tax sale;
- 115% of the amount of the Minimum Bid if the property is redeemed after six (6) moths but before one (1) year of the date of the tax sale;
- Five percent (5.0%) per annum of the amount of any overbid over the amount of the Minimum Bid.
In addition, the tax sale purchaser may pay additional property tax payments as they become due during the one year redemption period, and is entitled to a five percent (5.0%) interest rate on these payments. Further, a tax sale purchaser may be entitled to payment of the amounts the tax sale purchaser spent on title work and other costs (more on this below) that they spend following the tax sale.
Notice of the Tax Sale
Once the Notice is prepared the county Auditor must send a copy of the Notice to the owner of the property at the last known address of the owner of the property as shown in the transfer books of the county (6-1.1-24-4). This Notice needs to be sent at least twenty-one (21) days before an application for authority to sell the property is made to a judge of the county (a perfunctory step allowing the Treasurer to sell the property at tax sale) (I.C. 6-1.1-24-4). Importantly, the Auditor is not required to send the Notice to a mortgage holder on the property unless the mortgage holder sends a written request to the Auditor (on an annual basis), by certified mail, requesting a copy of the Notice (I.C. 6-1.1-24-3 (c)).
Sale
Most Indiana tax sales occur in September and October. The specific dates for the 2017 sales conducted by SRI are attached to this article. Also attached is Information and Procedures materials for both the Marion County tax sale and the tax sales conducted by SRI. Generally any tax sale purchaser is required to deposit sufficient cash with the Treasurer on the date of the tax sale to pay any successful bids for the tax sale properties.
At the tax sale, a purchaser is required to bid the Minimum Bid for the property, but is also entitled to make an overbid of any amount for the property. Tax sale purchasers usually have researched properties prior to tax sales, and often bid significantly more for a property than the Minimum Bid if, in their opinion, the property is worth more than the Minimum Bid and if the property is likely to be redeemed. As discussed above, the tax sale purchaser is entitled to five percent (5.0%) per annum interest on this overbid amount when the property is redeemed. Therefore, for a property in which there is a minimum bid of $50,000 and a $100,000 overbid, if the property is redeemed six (6) months after the sale, the redeeming party will have to pay not only the taxes, penalties, Treasurer fees the tax sale purchaser’s expenses, and the minimum bid, but also 10% of the minimum bid ($5,000) and 5% (annualized and therefore 2.5%) of the overbid ($2,500) in additional interest. In other words, it often becomes very expensive to redeem a property after tax sale.
After the Sale
An Indiana tax sale conducted by a county Treasurer does not convey title to a property. Rather a Tax Sale Certificate is issued to the purchaser. The Tax Sale Certificate entitles the purchaser to receive the interest and penalty amounts set out above if the property is redeemed, or Tax Deed to the property if the property is not redeemed in the one (1) year period following the tax sale (I.C. 6-1.1-25-1). This Treasurer’s Deed is generally issued free and clear of any liens and encumbrances other than accrued property taxes and a few other exceptions. Importantly a mortgage holder’s lien interest in the property sold at tax sale and not redeemed in the one (1) year period following the tax sale is generally extinguished (I.C. 6-1.1-25-4). While a mortgage holder may apply to be paid any remaining overbid amount following a Tax Deed being issued, any decision to not redeem a property and instead elect to apply for the overbid amount should only be made in conjunction with advice of competent real estate counsel.
Following the tax sale the purchaser of the Tax Sale Certificate is required to research the records of the property and give a Notice to any record of holder of an interest in the Property. This notice needs to be sent by the tax sale purchaser no later than six (6) months after the tax sale (I.C. 6-1.1-25-4.5). This notice is required to be served upon all mortgage holders to a property sold at tax sale. Unless a mortgage holder requested notice of a tax sale as described above, this may be the first time a mortgage holder becomes aware of a tax sale and the requirement that the property be redeemed. The amount necessary to redeem a property at this point could be significantly in excess of the property tax amounts which were due prior to the tax sale.
Recommendations for Mortgage Holders
In order to protect a mortgage holder’s lien interest in a property in the most cost effective way possible, a mortgage holder should consider the following:
- Establish payment of a property tax escrow as part of the monthly loan payment (similar to residential mortgage loans and many CMBS loans) so that payment of property taxes can be paid directly by the lender to the Treasurer.
- Require a borrower in the loan documentation to submit evidence of property tax payments prior to the due date of each installment.
- Request on a yearly basis that the county Auditor supply you with a list of properties eligible for tax sale, and review the notice to determine that the mortgaged property is not listed.
- Consider making a protective advance if the property tax is not paid by the borrower within a few days prior to the tax sale to avoid significant additional penalties and other costs.
- If the mortgaged property is sold at tax sale with a significant overbid, consider whether receipt of the overbid amount would produce more value than the costs associated with redeeming the property with a protective advance followed by a foreclosure (and reviewing these considerations with experienced real estate counsel).
Conclusion
In order for a lender to protect a mortgage lien interest it is critical that the property taxes on the mortgaged property are paid prior to the property being sold at tax sale and not redeemed during the redemption period. Further, it is far less expensive to ensure that the taxes are paid prior to a property being sold at tax sale than dealing with this issue during the redemption period after a property is sold. If you have additional questions regarding these tax sale issues, please contact Jay Kennedy or any of our other attorneys here.
[1] Once an installment becomes delinquent, a penalty is added to the property tax amount. The penalty is five percent (5%) if paid within thirty (30) days of the due date and ten percent (10%) if paid between thirty (30) days late and the due date of the next installment.
[2] The sale process is slightly different for vacant or abandoned real property. These differences are not discussed in this article.
Tax Deed Purchasers Beware: Due Diligence is Required