Our friends at Cantrell McCulloch [link to website] bring to our attention a topic that could literally be a “drag” on your collateral: the valuation given to the collateral by the applicable taxing authorities (public and private).
Taxing authorities could be state, county, city, hospital, school, road and other governmental authorities; and also “private” (not governmental) bodies in instances, for example, where fees are “spread” among multiple lots or parcels pursuant to private agreements (such as deed restrictions).
When you stop and think about it, you’ve probably seen line items in operating budgets for taxes and assessments, but have you stopped to consider whether the borrower has actively protested or tried to lower the valuation that provides the basis for the cost? And, have you (as lender or servicer) investigated and considered your ability to lower valuation PRIOR to taking title to the collateral?
I know, you’re thinking: “surely the borrower has investigated the tax valuation of the property.”
Maybe. Maybe not.
Often, borrowers have much, much larger fires to fight; and devoting a reduced staff to reducing property valuation so as to save money in the FUTURE is, well, not important when the borrower is fighting simply to keep afloat today – and keep the property.
So, my suggestion simply is to add this topic to your workout check list, and include the following as tasks directed at this ticking sound:
- What taxes or assessments cover or encumber the collaterals? Governmental (per a current search of applicable governmental taxing offices)? Private (per a current title report)?
- What valuation has been given to the collateral? (Is it high?)
- How is valuation determined?
- What are the key dates (Due dates? Appeal dates? Etc.)
- Has the ownerborrower contested the valuation? Are written agreements covering valuation in place?
- Is it possible to file a “late” appeal? Are there special conditions for filing a late appeal?
- What input or role does the lenderservicer have in the valuation determination or appeal process? (Under applicable law or regulations? Under the loan documents?)
Todd Franks (with The Cantrell Company) tells me that they have recovered over $100,000 in overpaid property taxes for one loan servicer, after a borrower failed to timely protest their 2008 property tax valuation (in a situation involving Texas real property collateral). His experience is that if the current owner is unsophisticated andor unfamiliar with the property valuation process, then when the owner is struggling to keep the property and to avoid a loan default or a foreclosure, many owners simply give up on contesting property valuations handed out by taxing authorities. (The result: it is a problem discovered by you AFTER you take title.)
Clearly, this topic qualifies as another one of my “ticking sounds” – topics inherent in real property collateral that can jump up and bite you during and after a loan falls into distress. (For other “ticking” topics, search this blog using the search term “ticking” in the search box on the lower right side of the page.)
Put this topic on your check list.
And follow up with Todd Frank (at firstname.lastname@example.org) if you’d like to talk with him.
Finally, as always, if you have any questions, comments or practical advice on this topic, please post a comment.