Owners of multiple properties in Luzerne County and elsewhere sometimes let real estate taxes slide on their less valuable holdings.
The delinquent properties won’t go to auction for 21 months, giving them time to figure out if they can or want to pay the taxes to keep them. The back taxes have no bearing on their freedom to sell or refinance other properties in good tax standing.
That’s changed with a new state law that quietly passed in November as part of an attempt to target slumlords and individuals and companies with financial means who neglect taxes on some properties.
This law, Act 93 of 2013, automatically attaches back-tax liens to all other properties owned by the same person or company within the county, county tax claim overseer John Rodgers said.
This will force owners to pay back taxes on all of their properties if they want to sell or refinance one of them, said Rodgers, of Northeast Revenue Service LLC, which collects back taxes and auctions delinquent properties on behalf of taxing bodies.
Payment would be necessary because a property title free of claims and liens is required in typical real estate transactions.
Liens will remain connected to all of an owner’s properties until taxes are paid or the delinquent property is sold by tax claim.
Allowing a property to go to tax action is now more risky for individuals and companies owning multiple properties because liens remain attached to the non-delinquent property if nobody bids at auction.
Around 700 properties that did not sell in past auctions are stuck in limbo in the county repository, where taxes continue to pile up unpaid. The county has the most repository properties among the 11 third-class counties in Pennsylvania.
Repository properties always remained in the original owners’ names, but the owners weren’t tethered to their abandoned property with liens on their remaining properties before the new law, he said.
“It’s changed the dynamics. It will stop some property owners from walking away from delinquent properties,” Rodgers said.
The new lien procedure is not retroactive and will apply to taxes in default for one year, or starting in January 2015, Rodgers said.
He expects the law will make more property owners pay within a year to avoid liens or satisfy debt they may otherwise ignore because of the lien ramifications on properties not in default.
Criticism of law
The new law hurts property owners in financial distress who are willing but unable to pay, said Diane Cipa, general manager of The Closing Specialists title insurance agency in Western Pennsylvania.
Cipa said many property owners and real estate professionals are unaware of the change, and she has written several online commentaries criticizing the law’s ramifications.
Attempts to liquidate individual properties will be hampered if tax debt on other properties is linked, she said.
She predicts mortgage lenders will reject short sales and deeds in lieu of foreclosure if properties come with back-tax baggage that has nothing to do with the mortgage transaction.
With a short sale, the owner must convince the lender to reduce the mortgage amount so the property can be sold. Lenders may allow normal closing costs but probably won’t agree to eat taxes on unrelated properties, she said.
Deeds in lieu of foreclosure mean the property owner returns the property to the lender so it does not have to bother with the foreclosure process, but Cipa expects banks to reject such offers if they will get stuck with tax liens for other properties.
Encouraging foreclosures is not good for property owners, lenders or communities with abandoned properties, she said.
“There are deadbeats, but there are many people who are struggling and don’t have the ability to pay who will be hit,” Cipa said. “You will have creditors and mortgage lenders whose hands are tied.”
Taking it a step further, Cipa questions if mortgage underwriters will approve fewer loans for second homes and investment property in Pennsylvania due to potential liens on multiple properties. Mortgage lenders may be less willing to grant waivers allowing borrowers to pay taxes on their own instead of through an escrow account, she said. She also said the liens are treated as personal judgments, which could have a more damaging impact on credit scores.
Court proceedings are not required to impose the liens under the new law, and a blanket approach prevents case-by-case decisions that could weed out hardship situations, Cipa said.
But Rodgers said he would not want to file liens selectively because of the potential for accusations of favoritism and cronyism. Before Northeast Revenue took over several years ago, the county’s tax claim office had many cases of property owners who escaped tax auctions even though they owed taxes more than two years and/or defaulted on repayment agreements.
Cipa also questions the need for the law because counties previously had the right to file judgments against delinquent property owners to tie in multiple properties.
Rodgers said this option wasn’t exercised because the format was different before the new law, and an action on each property would have cost about $3,000. The tab for 100 properties would have been $300,000, he said.
He considered pursuing an action against the owner of a giant water retention basin at the Wilkes-Barre Township Commons retail center that carries a $303,050 unpaid tax bill dating back to 2008. However, the entity that owns the 5.5-acre basin created a limited liability company — RB Wilkes Barre — that owns no other property, he said.
RB Wilkes Barre obtained a subdivision to split off the basin, which allowed the entity to abandon the parcel after other lots were developed and sold. County officials held off on auctioning the parcel because they don’t want bidders unknowingly stuck with an unusable flood prevention system.
In response to the new law, some lawyers have started reminding clients about the benefit of putting ownership of investment properties under limited partnerships or limited liability companies so their homes and businesses are not impacted if property tax payments on the investments go into default.
The law also creates a “horror story” for title searchers who must identify outstanding claims and liens on specific properties because they will have to expand their research to see if people own other properties and, if so, whether taxes are owed, Rodgers said.
This search is easier in Luzerne County because Northeast Revenue’s back-tax payments are online in a searchable database, but Rodgers said few other counties provide this level of remote access.
“There are definitely pros and cons to the new law,” Rodgers said.