Property Tax Forfeiture
What is Property Tax Forfeiture? Property tax forfeiture is a process where the state takes ownership of real property if property taxes are not paid. When property taxes are not paid in the year due, the taxes become delinquent as of January 1 of the following year. Those holding liens on the property are usually not provided with notice of the property’s delinquent taxes at this time. If the property owner does not contest the delinquent taxes, the district court automatically enters a judgment for forfeiture against the property in May following the delinquent tax year. After judgment is entered against the property, the redemption period commences. Depending on the use, location, and ownership of the property, the redemption period is either one, three, or five years from the date of entry of the judgment. During this redemption period, the owner or anyone having an interest in the property (i.e. a lienholder) can pay the delinquent taxes to avoid tax forfeiture. If the delinquent taxes remain unpaid at the expiration of the redemption period, the property is automatically forfeited to the state where it held by the state in trust for the local taxing districts. The owner may have to option to repurchase the property from the county or the county can sell the property at a public or private auction. However, the owner and lienholders are not entitled to any of the proceeds from the sale. How are Mortgages affected by the Property Tax Forfeiture Process? When a property secured by a mortgage is subsequently forfeited for delinquent property taxes, it is very likely that the mortgage is extinguished. When the mortgage was duly recorded or filed in the county records, and the certificate of expiration of redemption was served upon the mortgagee, the mortgage would be cancelled by operation of the tax forfeiture. As such, it is pertinent that lenders understand the property tax forfeiture process and annually check whether the mortgaged properties are in danger of property forfeiture. Unfortunately, a lender cannot pay only the delinquent year’s property taxes to avoid forfeiture. The county applies any money it receives first to the latest delinquent year and then to each subsequent year. Thus, all delinquent taxes would need to be paid to avoid any forfeiture. What can lenders do to protect themselves? There are several preemptive steps lenders can take to protect themselves from losing their interest in a property due to tax forfeiture. First, the mortgage should contain provisions that all amounts paid by the lender to protect its interests, including payment of property taxes, shall be added to the indebtedness secured by the mortgage. Second, lenders may file their names and current mailing addresses with the county auditor in the county where the land is located to receive notice of delinquent property taxes. The filing fee is $15, and it must be renewed every three years. Finally, lenders can also require that property taxes be included in the mortgage payments and then pay the taxes themselves. With this option, payments for taxes will be escrowed with the lender, and the lender will be in control of […]
Read moreEnvironmental Considerations in SBA Gas Station Loans
Loans made to or involving gas stations can present the lender with some unique environmental concerns. As such, the SBA Standard Operating Procedures (“SOPs”) include specific requirements for all loans secured by a lien or security interest on real property (a fee simple or leasehold mortgage, deed of trust, etc.) or personal property (gas station fixtures or equipment such as tanks, pumps, lines, etc.) currently used to operate a gas station or commercial fueling facility (which the SOPs refer to as “Gas Station Loans”). The SOPs include specific environmental investigation requirements for Gas Station Loans, which are set forth in Appendix 5 of SOP 50 10 5 (H). The environmental investigation for all Gas Station Loans must begin with a Phase I ESA, which must be conducted by an independent “Environmental Professional” (generally, “a person who possesses sufficient specific education, training, and experience necessary to exercise professional judgment to develop opinions and conclusions regarding conditions indicative of releases or threatened releases on, at, in, or to a property” (see 40 CFR 312.10(a) for full definition)). The Phase I must include an analysis of all relevant documents for not only the subject property, but also adjoining properties. The environmental investigation must also include a determination as to whether the gas station is in compliance with all state requirements pertaining to tank and equipment testing. If the Environmental Professional recommends any further investigation (such as a Phase II), such investigation must be made. If the results of the environmental investigation are that the property is not contaminated, lenders submitting loans through general processing must submit the investigation to the SBA with recommendations and seek SBA’s concurrence. Lenders processing PLP, 7(a) Small Loans, SBA Express and Export Express loans, do not have to submit the environmental investigation reports to the SBA but they must keep a copy of any report in the loan file. If the results of the environmental investigation are that the property is contaminated, and the lender wishes to continue with the loan, the lender must follow the requirements set forth in the sections of the SOPs entitled “Approval and Disbursement of Loans When There is Contamination or Remediation at the Property” (See SOP 50 10 5 (H), Section III –Environmental Policies and Procedures, paragraph G, at page 179). This includes, but is not limited to, submission of a recommendation to the SBA that includes a discussion on such topics as the nature and extent of the contamination, status and recommended method of remediation, collateral value, and any mitigating factors. Further, if the results of the environmental investigation are that the property is contaminated and the loan is for the purchase of the gas station, in most instances SBA’s form of Environmental Indemnification Agreement (found at Appendix 6 of SOP 50 10 5 (H)) must be signed by the seller. Also note that, if any fuel supplier, oil company or other party, such as a seller, has a right to indemnification from subsequent owners of the property, then that party must execute either the SBA form of Environmental Indemnification Agreement or some other document in which they waive and release […]
Read moreTax Forfeitures
This is a follow-up to our Advisor article “Property Tax Forfeiture”. The beginning of the year is the time to start thinking about property taxes in Minnesota. When property taxes are not paid in the year due, the taxes become delinquent as of January 1 of the following year. If the property owner does not contest the delinquent taxes, the district court automatically enters a judgment for forfeiture against the property typically in May following the delinquent tax year. The redemption period then commences. If the delinquent taxes remain unpaid at the expiration of the redemption period, the property is automatically forfeited to the state where it held by the state in trust for the local taxing districts. Those holding liens on the property are usually not provided with any notice of the property’s delinquent taxes. Further, property taxes are senior to any mortgage encumbering the property. This means a mortgage is extinguished if the property is subsequently forfeited for delinquent property taxes. As discussed in the previous Advisor, lenders can take several preemptive steps to protect themselves from losing their interest in a property due to tax forfeiture. Because the property tax forfeiture process can happen quickly in certain circumstances, it is best practice for lenders to take efforts to remain informed on the tax status of properties securing their loans.
Read moreWhy You Shouldn’t Waive the Landlord’s Waiver
Although seemingly a relatively straightforward document, Landlord’s Waivers (sometimes referred to as Landlord’s Agreements, Lessor’s Agreements, Landlord’s Consents, Landlord’s Certificates, etc., generally referred to as a “Landlord’s Waiver” herein) are often a thorn in the side of commercial loan transactions. Generally speaking, a Landlord’s Waiver is an agreement between the lender and the borrower’s landlord which governs issues such as the priority of the parties’ respective security interests in the personal property owned by the borrower serving as collateral for the borrower’s loan, the right of the lender to access and liquidate the collateral, and the lender’s option to cure defaults under the lease. What makes the dynamic of the Landlord’s Waiver complex is that the lender often has very little leverage over the landlord. Frequently, this leads to instances where landlords are either unwilling to sign a Landlord’s Waiver altogether or are unwilling to sign a Landlord’s Waiver containing the lender’s required terms. Of course, it is beneficial for the landlord to have a tenant with a successful enterprise and adequate cash-flow, and therefore, the tenant’s access to financing may be valuable to the landlord. Outside of that, however, landlords often fail to see much incentive to acquiesce to the lender’s request for a Landlord’s Waiver. The failure to obtain a Landlord’s Waiver on the lender’s preferred terms is problematic on any commercial loan transaction because it can lead to disagreements between the landlord and the lender over a variety of issues. The result of these disagreements may be minor, such as the landlord may simply require payment of past due rent in exchange for the lender’s access to its collateral. However, the results may also be substantial. For example, the failure to have a Landlord’s Waiver may result in lengthy and costly litigation and/or the lender losing a priority claim in the collateral. The failure to obtain a Landlord’s Waiver is especially problematic for Small Business Administration (“SBA”) guaranteed loans as the Landlord’s Waiver is often a requirement. The SBA requires a Landlord’s Waiver, containing specific provisions, from a landlord when there is: leased space where any personal property pledged as collateral for the loan is located; leased space where a substantial portion of the loan proceeds will be used to fund leasehold improvements; or a substantial portion of the collateral consists of leasehold improvements, fixtures, machinery or equipment that is attached to the leased space. The SBA requirements, as set forth in the Standard Operating Procedures (“SOPs”) and the SBA National 7(a) Authorization Boilerplate, provide that a Landlord’s Waiver should, at a minimum, contain the following three provisions: Landlord shall subordinate its interest in the collateral, if any, to lender’s interest; Landlord shall provide lender at least 60 days’ written notice of a default under the lease prior to terminating the lease and shall provide Lender opportunity to cure the default (the SBA Authorization typically only requires a “reasonable” period to cure the default, but the SOPs contemplate a 60 day cure period where a “substantial portion” of the loan proceeds are to be used for leasehold improvements. Since it is subjective as to whether a “substantial […]
Read moreProperty Tax Appeals
PROPERTY TAX APPEALS MUST BE FILED BY APRIL 30, 2014. April is the month to be thinking about property taxes in Minnesota. Each spring, property owners are notified of their proposed property taxes payable the following year. This property tax assessment is determined, in part, by the classification of the property and the estimated market value of the property, which are calculated by the county assessor. If you dispute the classification or valuation of a property, the property tax assessment can be appealed. Property tax appeals for taxes payable in 2014 are due by April 30, 2014. April is also the month when the proposed value and taxes payable for 2015 are established. During April, the Local and County Boards of Appeal and Equalization will consider informal requests to lower the tax assessed value of properties for taxes payable in 2015. Assessors will also consider informal requests, substantiated by market evaluations and/or appraisals, during this time. Who can appeal property tax valuations? Anyone with right, title, or interest in the real property, including a lien, may appeal or challenge the property tax assessment. Therefore, a lender who holds a mortgage against real property does not need to wait until the property is bank owned before filing a tax appeal. What is the basis for a property tax appeal? The most common reason for a property tax appeal is based on a dispute over the valuation of the property. County assessors must determine each property’s market value as of the assessment date of each year. To accomplish this, county assessors use historical sales to make these valuations. However, county assessors also review other various factors in determining a property’s valuation, such as market condition, square footage, and physical features. Generally, the market value of a property is the price a willing and able buyer would pay the seller for the property in an arm’s length transaction. In addition, a property must be assessed at market value that is uniform with similar properties. Therefore, if you feel that a property you have an interest in, or lien against, is valued at a greater amount than it would sell for or if the property is valued higher than other similar properties, the property may be overvalued. Do the property taxes need to be current to appeal? Yes, the tax court will dismiss any appeal where the tax payments are delinquent. This includes paying the challenged property taxes by the May 15 and October 15 deadlines, even if an appeal is pending. Under certain circumstances, tax payments for the year in which the appeal is filed may be partially paid. What should I do? Most counties have websites where you can view the tax value for real properties for taxes payable in 2014, as well as the proposed value for taxes payable in 2015. If you feel that properties you have an interest in, or lien against, are valued in an amount greater than their true market value, Jellum Law can help you determine an appropriate course of action.
Read moreThe New CFPB Mortgage Rules: A Summary of What They Are and What They Mean
The Dodd-Frank Wall Street Reform Act and Consumer Protection Act (“Dodd-Frank Act”) amended both the Real Estate Settlement Procedures Act (“RESPA”), which is implemented by Regulation X, and the Truth in Lending Act (“TILA”), which is implemented by Regulation Z, in 2010. Both these Acts address the servicing of mortgage loans. The Consumer Financial Protection Bureau (“CFPB”) is the federal agency responsible for overseeing all federal financial laws that specifically protect consumers, including RESPA and TILA. In January 2013, the CFPB issued rules to implement the Dodd-Frank amendments (the “Mortgage Servicing Rules”) which took effect on January 10, 2014. This article provides a summary of what you, as a mortgage servicer, must do to comply with these rules as they relate to closed-end consumer credit transactions secured by a dwelling (referred to in this article for convenience as “mortgage loans”). Some of these rules only apply to mortgage loans secured by the borrower’s principal residence. We’ve noted the limited applicability of those specific rules in this article. Additionally, the Mortgage Servicing Rules may apply differently to creditors or assignees of consumer mortgage loans or to different types of mortgage loans, such as open-end lines of credit or home equity lines of credit, reverse mortgages, timeshare loans, and fixed-rate loans that have coupon books. This article does not discuss how the Mortgage Servicing Rules apply to those types of mortgage loans. Although this article covers many of the provisions of the Mortgage Servicing Rules, it is not meant to be a comprehensive summary of these rules. We recommend you consult the text of the final rules, in addition to this article, for guidance in specific situations. The rules can be found here and here. I. Small Servicer Exemptions Certain servicers are exempt from some provisions within the Mortgage Servicing Rules as “small servicers.” If you and any affiliates together service 5,000 or fewer mortgage loans per year, you may qualify for these limited exemptions as a small servicer. Your small servicer eligibility is determined each calendar year and is based on the loans you and your affiliates service from January 1 through the remainder of that year. Should you cross the 5,000-loan threshold or take on a loan you do not own or did not originate, the Mortgage Servicing Rules allow you 6 months to comply with any requirements you were previously exempt from as a small servicer. However, if you service any consumer loans which you do not own or did not originate, you do not qualify for the small servicer exemption, no matter how few mortgage loans you service per year. Additionally, there are some provisions which apply to all consumer mortgage servicers, regardless of how few mortgage loans you service per year. II. Fair Debt Collections Practices Act (“FDCPA”) Interplay In addition, compliance with the Mortgage Servicing Rules often intersects with the Fair Debt Collections Practices Act (“FDCPA”), which applies to you if you are a debt collector under the FDCPA. We have also noted throughout Parts One and Two what actions you should take to comply with both your obligations under the Mortgage Servicing Rules, as well […]
Read moreLessons from the Past can Protect you in the Future
The past several years can provide valuable lessons to lenders in the unfortunate event that current or new loans end up in foreclosure. A proactive eye towards certain aspects of the lending transaction can provide the key to a successful foreclosure. Therefore, before securing a loan with a mortgage on real property, take into account these considerations and circumstances which may affect the foreclosure process down the road. 1. Marshalling Waiver Clause. Minnesota law requires the sale of separate parcels. The inclusion of a marshalling waiver clause gives the foreclosing lender much more discretion in the foreclosure process, and it allows the lender to foreclose multiple parcels in the same sale, saving costs and expenses while expediting the foreclosure process. 2. Waiver of 12 Month Redemption Period. Under Minnesota law, in certain circumstances, a mortgagor may have a 12 month redemption period. This can be waived when the 12 month redemption period is based upon the property being in agricultural use as of the date of execution of the mortgage. The waiver must be written in a document separate from the mortgage or as a separately executed and acknowledged addendum to the mortgage on a separate page. 3. Waiver of Jury Trial. In Minnesota and Wisconsin, a mortgagor can waive the right to a jury trial within the loan documents. Jury trials are far more expensive and time consuming than bench trials (a trial where the judge determines the final outcome). Eliminating the possibility of a jury trial will expedite the foreclosure process if trial becomes necessary. Make sure the waiver is broad enough to include the waiver of the right to a jury trial on attorneys’ fees claims. 4. Assessment of Tax Classification. It is good practice to investigate the tax classification of potential collateral. When property is classified as agricultural, the foreclosure process can vary. For example, the mortgagor may be able to request pre-foreclosure mediation, the redemption period could be 12 months, and the time period to collect a deficiency from the sale could be shortened. If the property is classified as agricultural, assess whether the property is currently in agricultural use. If not, consider requiring the borrower to petition the county to change the tax classification. 5. Obtain Signatures of All Property Owners. Before executing a mortgage, determine who all the owners of the property are. It is best practice to get all owners to sign the mortgage. When a mortgage is not signed by all the property owners, the mortgage only secures the interest of those signing the mortgage. If foreclosure becomes necessary, the lender can only foreclose on that interest–leaving the successful bidder at the foreclosure sale as a co-owner of the property with the non-signing property owners at the expiration of the redemption period. These interests are much harder to sell post-foreclosure. It is also prudent to determine the marital status of a mortgagor. Under both Minnesota and Wisconsin Law, generally a mortgage on a homestead is deemed invalid if the mortgage is not signed by both spouses. Therefore, lenders are unable to enforce its mortgage against homestead property without the signature of […]
Read moreNew Notice Requirements for Residential Contracts for Deed
During the recession of the last several years, the amount of financial institution-owned real property reached historically record levels. As the economy continues to improve we are seeing, for the first time in a long time, financial institutions selling more OREO property than they are acquiring. Through this, one interesting trend is that financial institutions are selling a significant number of these properties on a contract for deed basis. A contract for deed can be appealing to sellers of real property for a number of reasons. For one, selling on a contract for deed basis greatly widens the market of available purchasers, as many prospective purchasers are unable to qualify for conventional note-mortgage financing. Further, a seller’s remedies upon default of a contract for deed are significantly more favorable than a mortgagee’s remedies upon default of a mortgage. For example, foreclosure of a mortgage by advertisement typically takes eight (8) months from start to finish. That timing can be significantly longer if the foreclosure is done by action, if the mortgagor has a 12-month redemption period, or if unexpected issues arise in the foreclosure process. However, a contract for deed can be effectively cancelled under Minnesota law, in most cases, by providing just 60 days’ notice following a default. Selling on a contract for deed basis can be especially appealing to financial institutions since, under Minnesota statutes, payments due to a financial institution as a contract for deed seller are excluded from the total liabilities of the purchaser owing to the financial institution for purposes of determining legal lending limit. Although contracts for deed are often a great option for both seller and purchaser, there seems to be a growing perception that contracts for deed purchasers do not always understand the ramifications of the transaction and that some contract for deed sellers are taking advantage of misinformed contract for deed purchasers. In January of 2013, the Minneapolis Star Tribune ran an article titled “Contract for deed can be house of horror for buyers” which, as its title suggests, discussed some of the pitfalls being realized by contracts for deed purchasers. The article can be found online here. In an effort to address many of the same issues discussed in the Star Tribune article, during the last legislative session, the Minnesota legislature passed Minn. Stat. § 559.202, which requires “multiple sellers” of residential property on a contract for deed to provide new notices to contract for deed purchasers. The new notice requirements under the statute, which take effect August 1, 2013, apply only to “multiple sellers” of residential property on a contract for deed basis. Essentially, a “multiple seller” is any person or institution that has acted as a seller in four (4) or more contracts for deed involving residential real property during the preceding 12-month period. Therefore, each time a financial institution is intending to sell residential property on a contract for deed basis, the financial institution should look back at the preceding 12-month period to determine if it has sold at least four (4) residential properties on a contract for deed during that period. If it has, the notice […]
Read moreReminder! Property Tax Appeals Must Be Filed By April 30, 2011!
April is the month to be thinking about property taxes in Minnesota. With the widespread decline in the market value of real property, many properties are being taxed at an amount far in excess of their fair market value. Property tax appeals, for taxes payable in 2011, are due by April 30, 2011. April is also the month when the Local and County Boards of Appeal and Equalization will consider informal requests to lower the tax assessed value of properties for taxes payable in 2012. Assessors will also consider informal requests, substantiated by market evaluations and/or appraisals, during this time. Who can appeal property tax valuations? Anyone with right, title, or interest in the real property, including a lien, may appeal the property tax assessment. Thus, a lender who holds a mortgage against real property does not need to wait until the property is bank owned before filing a tax appeal. Do the property taxes need to be current to appeal? Yes, the tax court will dismiss any appeal where the tax payments are delinquent. However, tax payments for the year in which the appeal is filed may be partially paid, under certain circumstances. What should I do? Most counties have websites where you can view the tax value for real properties for taxes payable in 2011, as well as the proposed value for taxes payable in 2012. If you feel that properties you have an interest in, or lien against, are valued in an amount greater than their true market value, Anastasi & Associates, P.A. can help you determine an appropriate course of action.
Read moreIssues to Consider Prior to Acquiring OREO
When an event of default occurs with respect to a loan that is secured by a mortgage encumbering real estate, there are a number of issues that should be investigated by the bank prior to its acquisition of the real estate (“OREO”). The bank’s due diligence related to such issues should be finalized prior to the recording of a deed in lieu of foreclosure or the holding of a sheriff’s foreclosure sale. The following, while not intended to be comprehensive, is a list of the most common issues that should be investigated: Liquidation value of the property Environmental condition of the property Current zoning classification of the property Whether the property is used for agricultural production Status of any conditional use permits Title defects, encumbrances, liens Easements, use licenses or restrictions Status of any foreclosure proceedings related to other mortgages and/or liens Status of property taxes and assessments Status of any property tax appeals Status of any property tax forfeiture proceedings Building code compliance issues and/or open work orders Status of any condemnation proceedings Whether the property is part of a Home Owner’s Association or Common Interest Community Whether the property has been sold via a Contract for Deed Any leases or rental agreements, whether written or verbal Status of any eviction proceedings Whether property is occupied or vacant Whether vacant property is properly secured and winterized Outstanding vacant property fees imposed by the municipality Status of property and liability insurance Status of utilities Whether it is advantageous for the bank to transfer the OREO into a subsidiary limited liability company after acquiring title Please feel free to contact our office to discuss any further questions or concerns.
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