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BUYING TAX LIENS: NOT ENTIRELY A GOLD INVESTMENT

by Christopher McNichol, Arizona attorney

(March 2004 – Please note the date on all articles. The law changes and this information may not be correct.)

The old adage holds that nothing in life is as sure as death and taxes. If so, then the liens sold as Certificates of Purchase (CPs) each year by the various Arizona county treasurers for delinquent real property taxes should be the surest of the sure.

The lure of handsome interest rates and the secured nature of CPs make for an attractive investment. While CPs no longer routinely command the maximum 16% statutory annual interest rate because of competitive bidding at the county tax lien sales, they do routinely bring interest rates in the range of 7 to 9%. In today’s market, that is enough to entice individuals, and increasingly state and national investor pools, willing to buy large blocks of CPs, often with minimal investigation of the properties themselves.
After being held for three years after purchase, CPs can then be foreclosed in court. If the owner or other interested party such as the mortgage holder does not redeem the CP prior to a foreclosure judgment, title to the property transfers to the CP holder, free and clear of most liens, including mortgages and deeds of trust, and other interests in the property.

But not every slate is wiped clean. Tax liens for different tax years have parity in terms of priority among themselves. So, for instance, a foreclosure of a tax lien for one particular tax year would not extinguish the rights of a subsequent year’s CP. And, along those lines, tax liens held by the State are generally not affected by the foreclosure of a CP by a private party.
Moreover, the sale of a real property tax lien does not extinguish certain governmental assessment liens, such as those arising out of municipal improvement districts, county improvement districts, and sanitary districts.

The tax lien sale has no impact on any easements affecting the property either. For example, if an adjoining parcel has an access easement across the property, the tax lien foreclosure of the property does not affect the access rights afforded under the easement.

There is also the federal government perspective. In the late 80’s, Congress established an intricate statutory scheme (“FIRREA”) to deal with the financial institution crisis. Broad powers were given to the Federal Deposit Insurance Corporation (and the former Resolution Trust Corporation), including exemption from tax liens that might otherwise attach to the FDIC’s property. This interplay between the established taxing structure of the states and the FDIC’s federal power was once a hot topic in the courts. While the concern still exists whenever FDIC property is involved and would thus impact CPs because they derive from the state’s taxing authority, the arguments are largely academic these days given that the FDIC has largely disposed of these real property assets flowing out of the failed savings and loan institutions.

On another federal front, the protection afforded a bankruptcy debtor can also impact tax liens. In particular, the United States Bankruptcy Code expressly allows the Bankruptcy Court to evaluate and even modify real property tax assessments and interest rates, including those accruing on CPs.

Finally, CP investors with the intent and hope of owning the property would do well to perform customary due diligence investigation. Such evaluation will reveal common real estate concerns such as properties which may be unmarketable (e.g. landlocked strips of land) or which have environmental problems.

While tax liens are sure enough investments, nevertheless apt wisdom about checking the gold-plating comes from an Arizona court case which said that a purchaser of a CP “must protect its own interest in the recognition that its purchase is not risk free.”

Christopher McNichol is a partner with the law firm of Gust Rosenfeld P.L.C. in Phoenix, Arizona. His practice includes general commercial transactions and litigation, with an emphasis on real property matters. He can be reached at 602 257 7496 or by email at [email protected]
*as published in the Arizona Journal of Real Estate & Business.

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