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Hedge funds dominate Miami-Dade tax lien sales, to critics’ dismay

Posted on by taxlieninvesting


Real estate brokers at the Biscayne Bay Marriott in Miami bid on a condo in 2007.

Real estate brokers at the Biscayne Bay Marriott in Miami bid on a condo in 2007.


NURI VALLBONA

Miami Herald staff/File

When taxes go unpaid, it’s usually Uncle Sam who has to make up the difference. But when it comes to county property taxes, a hedge fund often covers the shortfall.

Under Florida law, county governments across South Florida and other areas of the country rely on investors to fill budgetary gaps when property taxes, due each year on March 31, are slapped with a “delinquent” label. Counties hold online auctions, called real estate tax certificate sales, where individuals or investment groups bid on the right to pay those taxes — and earn the resulting interest.

Rather than borrowing money, as the federal government often does, Florida use this little-known auction process. In Miami-Dade, this year’s auction will run from June 1 to June 3; in Broward, it is scheduled to run from May 5 to May 27.

In South Florida, delinquency rates generally fall within 3 and 6 percent — the typical range nationally. In 2015, 6.2 percent of Miami-Dade properties were delinquent on their taxes. In Broward, 2.7 percent of properties were delinquent, while in Palm Beach, 4.6 percent of properties were delinquent.

When that happens, the government places a lien on the property. Investors can then bid on the right to enforce the lien.

Some counties award these “tax certificates” by bid; others use software that makes random selections. The winners pay the outstanding taxes in exchange for earning interest. The rate is capped at 18 percent but is generally lower — about 10 percent, according to Peter Larsen of the National Tax Practice Group.

“[Counties] say, ‘Which investors are willing to give me $5,000 to cover taxes? The homeowners will you pay you back the interest,’ ” explained Larsen.

“It’s not a new concept. It’s been the solution for governments recouping funds,” said Brad Westover, executive director of the National Tax Lien Association, a nonprofit trade group.

If the homeowner does not pay the tax, plus interest, within two years, the lien holder takes ownership of the property, be it a single-family home or a warehouse. However, less than 1 percent of property owners fail to pay their taxes and interest within the allotted time and are forced to forfeit ownership, according to Westover.

South Florida counties have yet to tabulate how many homeowners are delinquent this year. In 2015, Miami-Dade recouped $164 million through sales of about 38,000 tax lien certificates on a wide range of properties, from single-family homes to warehouses. In Broward County, sales of almost 24,000 tax certificates recovered more than $88 million, while tax lien sales in Palm Beach earned about $72 million.

“All in all, citizens pay their taxes. But when you’re the size of the counties that we’re talking about, when people don’t pay, it adds up,” Westover said.

Most local experts say the tax certificate sales benefit the county coffers, investors and property owners, who may pay a more favorable interest rate on their tax debt than they might get at a bank.

But the system has its detractors.

WIN-WIN AT WHAT COST?

Some industry watchers complain that in some metro areas, including Miami-Dade County, small investors typically are locked out of the system by allowing each bidder to vie for multiple liens. The county’s key objective is to “procure the greatest amount of tax sale possible” to distribute to municipal government agencies such as public schools, the police force and fire department, said Miami-Dade tax collector Marcus Saiz de la Mora.

Broward and Palm Beach County use variations of a single-bidder system, which prevents companies from using multiple shell companies or subsidiaries to bid.

“There was a sort of gold rush . . . and it crowded out smaller investors,” said Broward County tax collector Tom Kennedy. Broward adopted the single-bidder rule in 2014, and Kennedy says it has not affected the county’s ability to recoup unpaid property tax dollars.

The tax-certificate system used nationwide has its beginnings in — where else? — South Florida. According to Westover, an accountant named Dick Heitmeyer found himself in a property tax snafu and, between the taxes, interest and fees, was forced to pay almost $100,000.

“[Heitmeyer] thought, ‘That’s a steep penalty,’ ” and a light went off in his head.”

Heitmeyer set up shop in West Palm Beach under the name Capital Asset Research Corp., got a $500 million line of credit from Lehman Brothers, the now-defunct Wall Street investment bank, and started buying up liens.

Now, investment groups bid on sales in major metro areas nationwide. And that can adversely affect overall property values in a local market.

“Hedge funds are more likely to dump the property at a low price,” explained Larsen. “They want to sell it quickly and get out, thereby driving down prices and hurting the market.”

Follow Debora Lima on Twitter @dtdlima

This story was originally published April 5, 2016 4:09 PM.





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