Do Commercial Buyers Consider Property Tax Special Assessments When Negotiating Real Estate Sale Prices?

Posted on Oct 27, 2022

Onuoha H. Odim

I. The Special Assessment Process

Local governments are permitted to collect surtax on a set of property owners on municipal renovations in qualifying assessment districts. These surtaxes are special assessments which are separate charges from real property taxes.[1] Special assessments are paid by property owners who receive a benefit from a public service. These benefits could include better sewage systems through sewer renovations, walkable and properly maneuverable sidewalks through a reconstruction of local walkways, and renovations to local public schools.[2] For local governments to charge a property a special assessment surtax, the property must be in a special assessment district.[3]

Special assessments are formalized though a recording process of the individual property, which documents the existence of a lien on the local government’s public land records.[4] The documentation may be in the form of a certificate memorandum or a full agreement and serves as evidence of the existence and terms of a special assessment on the subject property.[5] This formalization allows any party reviewing the title record to see the assessment.[6]

Once recorded, the local government can bill and collect taxes for the purposes of the different assessments on that property based on jurisdiction, monetary needs of the district, and the assessed value of the property.[7] In the case where a property owner is delinquent on their taxes or special assessment payments after a certain period of time, which varies by jurisdiction, the property is in default and the lienholder may enforce payment of the lien through a tax sale. A tax sale may be a tax deed sale (i.e., a direct foreclosure on the property), or a tax lien sale (i.e., selling the assessment lien on the property), where proceeds from the foreclosure or the tax lien sale cure the delinquent assessment.[8] The proceeds from the arrears payment pay off the creditors in order of seniority. Commercial PACE financing are always the most senior credit paid off and provide a good example as to the considerations property owners take when considering special assessments.[9]

II. Commercial PACE Financing

Commercial Property Assessed Clean Energy (C-PACE) is a method of financing energy improvements on commercial buildings through special assessment taxes. C-PACE legislation generally enables governments to collect C-PACE special assessments in the same manner as real property taxes or special assessments in the state.[10] State-enabling legislation delegate procedural tasks of C-PACE programs between program administrators, capital providers, and property owners with contracts to settle how they will carry out unaddressed aspects of the process.[11]

The local government or its representative, i.e., capital providers, legally establishes assessment liens in the following way: entering into a contract with the property owner; setting an assessment amount on the property through a special assessment resolution; and finally, adding the assessed payment amount as a charge on the property tax bill.[12] To certify the relevant assessment payment installments have been made, the local government typically receives the documents and enters the information into the public record and the responsible government department sends the amount received into the appropriate account to be sent to the appropriate capital provider. [13] Just like other surtax billings, collections and remittances of C-PACE property tax payments occur once or twice a year.

Tax bills break out C-PACE special assessments as a separate charge from the real property taxes and other special assessments.[14] Unlike property taxes, the amount of an individual C-PACE assessment installment is not calculated based on a mill rate.[15] Instead, it is simply a reflection of the fixed annual payment of principal and interest on the original C-PACE financing amount.[16] Local governments do not calculate C-PACE special assessment installment amounts, rather, the program administrator typically provides the local government with a schedule that includes the fixed payment amount for a specified term for each subject property to add to the property tax bill.[17] Local legislation specifies what happens during the charge and payment process. For example, Massachusetts law requires that the C-PACE charge appear on the property tax bill[18], while in Texas, lenders generate and send their own bills to participants.[19]

Just like a typical surtax, outstanding C-PACE payments subject the property to a tax sale or foreclosure with the future balance and schedule obligations transferred to the new owner. Unlike residential financing, commercial financing typically involves more sophisticated borrowers who are more likely to view each cost broken down by line item in transaction documents. In the event of high arrears and property transfer, the new lienholder has the right to initiate tax sale proceedings since the PACE lien travels with the property. And, unless the municipality directly provided capital for the C-PACE project, a foreclosure will likely not impact the jurisdiction’s financial standing since, depending on the enabling legislation, the local government will not be responsible to make C-PACE assessment payments to C-PACE financiers.

Unlike a residential purchase and sale, where buyers might miss or forget to identify a surtax from a government imposed or individual renovation on the neighborhood or retrofitted property, a commercial lender, their legal counsel, and/or the buyer themselves have more of a financial incentive to go line by line and identify where costs aggregate and which surtaxes and charges need to be prioritized in making buying decisions. Since property tax special assessments directly influence the bottom line—net income—of any commercial transaction, it is more likely that the party buying the property will be more cognizant of costs that are affiliated with that property to potentially negotiate a sale price that is reflective of the fiscal benefit of that special assessment and the costs that are associated with the assessment.

III. Conclusion

Residential buyers could irrationally fail to notice or care about a property tax special assessment because they will treat a property tax assessment differently than another type of obligations that runs with the property.[20] However, it is arguable that commercial buyers will be more cognizant of each cost attached to the subject property. C-PACE programs allow cost-free transfer of PACE financial obligations, but because property and tax records do not show whether bargaining occurs during the negotiation process, uncovering whether these buyers are more aware of surtaxes associated with special assessments would require interviewing buyers and sellers following any sale of a C-PACE property. Even then, evaluation does not account for likely changes in buyer behavior if PACE programs reach a large enough sale such that agents are familiar with the C-PACE surtax.[21] However, since C-PACE is a built-in cost, a buyer cannot get out of it, making property assessed surtaxes a factor that influences the price the buyer pays. A commercial buyer typically considers what taxes are associated with the property and if it is possible to get out of some of those taxes. Since C-PACE runs with the property, during initial negotiations, a commercial buyer would be typically made aware of the balance and C-PACE schedule before closing. As Professor Ashira Ostrow noted, “[unlike less sophisticated buyers] commercial buyers will typically consider all associated taxes with the property when making buying decisions.”[22]

Acknowledgements

For participating in interviews and providing input for this Blog Post, the author thanks Professor Ashira Ostrow, Peter S. Kalikow Distinguished Professor in Real Estate Law and Professor of Law at Hofstra University and Visiting Professor of Law at Columbia Law School.

 

[1] Benjamin Harrow, Special Assessment Taxes on Property, 7 Nat’l Income Tax Mag 187 (1929).

[2] Greg Leventis & Lisa Schwartz, Commercial PACE Financing and the Special Assessment Process: Understanding Roles and Managing Risks for Local Governments, Lawrence Berkeley National Laboratory, (June 2019), https://www.energy.gov/sites/default/files/2020/02/f71/CPACE-Special-Assessmentv3.pdf.

[3] J. C. Peppin, Priority of Tax and Special Assessment Liens, 23 Calif. L. Rev. 264, 298 (1935).

[4] Greg Leventis et al., Lessons in Commercial PACE Leadership: The Path from Legislation to Launch, Lawrence Berkeley National Laboratory (Feb. 2018), https://eta-publications.lbl.gov/sites/default/files/lessons_in_commercial_pace_leadership_final.pdf (“A lien is a legal right to a property in the event of nonpayment of an assessment or other obligation e.g., mortgage. A taxing authority places the lien to secure a special assessment and may issue the lien to another party”).

[5] Leventis & Schwartz, supra note 2 at 4.

[6] James Chen, Tax Roll, Investopedia (May 26, 2022), https://www.investopedia.com/terms/t/tax-roll.asp. For Residential PACE (R-PACE) special assessments in New York City, the process includes having access to the public record of the home tax liens online through Acris.  NYC Department of Finance’s Property Tax Public Access web portal is a public access resource for information about New York City property taxes. See Property Tax Public Access Web Portal, NYC Dep’t Fin., https://a836-pts-access.nyc.gov/care/forms/htmlframe.aspx?mode=content/home.htm.

[7] Leventis & Schwartz, supra note 2 at 5. Invoices sent to the property owner are also input in billing software systems, which include the property tax assessment plus any special assessment charges, typically once or twice a year. Id.

[8] Id.

[9] Prentiss Cox, Keeping Pace: The Case Against Property Assessed Clean Energy Financing Programs, 83 U. Colo. L. Rev. 83, 95 (2011).

[10] Leventis & Schwartz, supra note 2 at 5.

[11] Id.

[12] Id. at 7.

[13] Id.

[14] Id.

[15] Julia Kagan, Mill Rate, Investopedia (June 2020), https://www.investopedia.com/terms/m/millrate.asp.

[16] Sandeep Nandivada, Energy-Efficiency Retrofits in the Commercial Sector: An Analysis of PACE Financing, On-Bill Repayment, and Energy Savings Performance Contracts, 29 J. Env’t. L. & Litig. 363, 370–72 (2014).

[17] Cox, supra note 9 at 91–92.

[18] Id.

[19] Id.

[20] Cox, supra note 9 at 98.

[21] Id.

[22] Interview with Ashira P. Ostrow, Visiting Prof., Columbia Law School, in New York, NY (Oct. 18th 2022).