(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
McNichol@gustlaw.com
*as
published in the Arizona Journal of Real Estate & Business.
