The Need For Municipalities To Sell Tax Liens

In New Jersey, unpaid real estate taxes are a “continuous lien” on land, N.J.S.A. § 54:5-6. However, it is often not easy for municipalities to realize a sufficient financial return on these liens. To enable municipalities to fund their operating budgets, New Jersey therefore lets them sell these tax liens. See N.J.S.A. §§ 54:5-1. Moreover, because these liens carry the same statutory 18% interest rate which a property owner must pay the municipality on real estate tax claims, the sale process has worked well for years, generating sufficient numbers of buyers. Indeed, an industry has grown up of tax certificate buyers who inject liquidity into the municipality finance system by purchasing outstanding tax liens.

Unfortunately, in 2010 this system was thrown into chaos by a bankruptcy court ruling in the matter of In re Princeton Office Park, L.P., 423 B.R. 795 (Bkrtcy. D.N.J. 2010), aff’d, Civil No. 10-3021 (D.N.J. filed September 14, 2010). This opinion declared that a bankruptcy court could arbitrarily change the statutory 18% interest rate paid on tax liens, even well after the liens had been purchased in the open market, thus effectively overturning the careful financial calculations that tax certificate buyers make in deciding to purchase liens. For nearly two years, while this ruling has wended its way up the appeal ladder, it has cast a pall over municipal finances and chilled the purchasing of tax liens. This blog post, and several others that will follow, will explore this ruling and its impact on municipal finances in New Jersey...