Pandemic Relief: How to Protect Tax Lien Interests

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

Even in the best of times, knowing how to protect tax lien interests requires work. Many who invest in tax liens and tax deeds do so in multiple jurisdictions or in multiple locations within a state. But the tax sale laws vary from one state to another, and the tax sale process can vary within a state. Add to the mix the upheaval caused by the COVID-19 pandemic and the legislative and other governmental efforts to assuage its economic effects and a complicated endeavor has become even more difficult to manage.

Today, protecting tax lien interests requires extra diligence and adjusting to various changes. Identifying changes to legislation and tax sale processes is always critical but even more so with the quickly issued pandemic relief laws and their trickle-down effect on the tax sale process and tax lien investments generally.

Adapting to Protect Tax Lien Interests

The US Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in an effort to stem the harmful impacts of the pandemic as businesses and governments closed offices across the country and stay-at-home orders and fear of infection resulted in widespread increases in unemployment. With many left financially vulnerable, state governments added to the CARES Act relief by issuing executive orders or legislation further protecting homeowners from eviction and foreclosure and, in some cases, changing tax sale dates. 

Tax sale investors are feeling the full force of these unexpected and continuing changes. With government offices closed, tax sales and eviction proceedings — where allowed — may have been delayed. For the investor, the state and local adjustments to the process for tax sales, from the sale to redemption, eviction, and ultimate disposition of liened property, can look like a tangled mess. But tracking these changes is a must to protect tax lien interests. Here we outline some of the changes to watch for to prevent losing value in your tax lien investment.

For purposes of this discussion, we refer repeatedly to tax liens, but the issues raised and monitoring suggestions apply equally to tax deeds.

The Tax Sale Process — Normally

The tax sale process is normally consistent. When property and other local taxes remain unpaid, the relevant state’s tax sale laws allow the local government to take a secured interest in the property and sell a tax lien or a tax deed to obtain the delinquent tax. The local government holds the tax sale with some regularity, often annually with the date set by either state law or locally.

Either before or after the tax sale, the property owner often has a redemption period, a deadline for bringing the delinquent tax or other fees current in order to protect an owner’s interest in the property. Once the redemption period has expired, the property owner usually has a period of time to repay the tax sale purchaser plus accrued costs and fees in order to extinguish the lien or deed interest. Following the expiration of that period, the tax sale purchaser may generally initiate foreclosure or similar proceedings to extinguish the property owner’s interest and obtain full rights and title to the property.

While some people frequent tax sales to acquire the real property, many buy tax liens and deeds as an investment. Commercial and institutional investors buy tax liens and deeds for the return gained when the property owner redeems or otherwise repays the investment or through the sale of the tax lien or deed in a secondary market.

Pandemic and Relief Efforts Affecting Your Tax Lien Investment

Successful tax lien investors track the tax sale process, locations, and deadlines to effectively manage their investments. The CARES Act and state-level relief efforts have upended the routine processes for tax sales, which were previously very predictable. To adjust, tax lien investors need to understand how the relief efforts aimed at helping individuals through financial insecurity have affected the tax sale process and to what extent these changes have affected the investor’s ability to protect tax lien interests.

Starting broad, the CARES Act includes a mortgage forbearance provision, allowing homeowners with federally backed mortgages to request leave to delay mortgage payments at least 90 days. To the extent a homeowner’s mortgage payment includes amounts the mortgage company pays for property tax, this would result in a permissive delay in paying those taxes. While this may not affect the tax sale process in the short term, it could have an impact on the number of properties that come up for tax sale down the road, delaying or even preventing delinquency in tax payments.

State and local governments have also taken steps that directly affect the tax sale process. In some cases, such steps have been necessary as a result of the CARES Act or other governmental actions. In other cases, state and local governments took action to help their citizens or because local government offices were closed as a result of a shelter-in-place or other pandemic-related edict. Some of these actions include the following:

  • A complete cessation of property tax collection efforts for the time being;
  • moratorium on eviction and/or foreclosure actions;
  • suspension or postponement of tax sales;
  • change to redemption periods and deadlines;
  • A change in the tax sale process, transitioning to online tax sales; and
  • postponement of the due date for property tax payments.

Every one of these changes requires a tax sale investor to recalculate redemption periods, foreclosure deadlines, tax sale dates, and other relevant milestones in the tax sale process. For institutional investors with tax sale portfolios in more than one state, making these adjustments and calculating the impact on the value of their tax lien investment portfolios can be very difficult.

Ways to Protect Tax Lien Interests during the Upheaval

Keeping current on legislative and executive action that can impact your tax lien investment has never been more important. By tracking the types of changes discussed above, tax lien investors can update their calendars for next steps, such as initiating foreclosure and eviction actions, and adjust the value of their portfolios to help inform future investment strategies. Following are some steps that can help protect tax lien interests regardless of jurisdiction.

First, follow changes at both the state and the local level where the property is located. State law may limit what local governments can do, and local governments within a state may each implement different changes to the tax sale process.

In reviewing changes resulting from legislative, executive, and local action, be sure to read the fine print. The actions may not apply to all existing mortgage or tax sales. Watch for fine details like these:

  • The mortgage forbearance provision in the CARES Act applies only to federally backed mortgages.
  • A moratorium on foreclosures may not apply to vacant or abandoned properties.
  • Foreclosures may be permitted despite a moratorium to prevent or because of serious injury, loss, or damage to the property.
  • Legislative or executive action may introduce new loss mitigation steps in the foreclosure or tax sale process, facilitated by regulators easing loan modification rules;
  • Limiting legislative or executive action may only apply to certain types of actions:

    1. Initiating new foreclosures;
    2. Proceeding with current foreclosures;
    3. Conducting foreclosure or tax sales; or
    4. All of the above.

Even with the abundance of legislative, executive, and local written guidance, questions are sure to arise. The haste in which governmental units have attempted to ease financial strain has surely resulted in areas missed. What about statutes of limitation on certain types of actions? What happens when a forbearance period or moratorium ends? For answers to these and related questions on how to protect tax lien interests, only time — and the assistance of an experienced tax sale attorney — will tell.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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