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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 71 As an example, in a recent scenario the taxing authority attached priming liens against a property in the amounts of all outstanding sales and personal property taxes owed by the borrower. The total amount of the liens was more than the fair market value of the property — leaving the lender “out of the money” in any attempts to seek recovery from the sale of the property. In this instance, the only solution for the lender was to abandon their rights in the property and have the receivership action discharged. Operational changes related to the enforcement and collection of taxes have impacted the receivership industry’s once indifferent approach to tax liabilities. In today’s economy, taxing authorities have become savvy about receiverships and the scope of authority that they create. Before the real estate crash, it was easy for a receiver to flash a court order and get the tax collector to “hold off the dogs,” while working to stabilize the asset they were charged with protecting. Taxing authorities now recognize when a receiver is merely using a delay tactic and have found new ways to hold the receiver — and indirectly the creditor — accountable for outstanding tax liabilities. In another recent example, one city delayed the sale of a property by requiring that all property violations be remediated – with all unpaid paid taxes be taken care of at closing — before they would release their lien on the property. There are a number of ways that a receiver can be restricted or prevented from completing his/her court appointed duties, including interagency coordination in which the taxing authority looks to other agencies or departments to assist them in putting pressure on the receiver to achieve their objective. In some instances a government agency will not allow a new business license, health inspection or other permit to be issued to the property until the tax liability is cleared. For example, a random building inspection may be conducted with what some would consider suspiciously coincidental timing – and the building subsequently red tagged. Upon satisfaction of the tax obligation, a red tag may be “mysteriously” removed, with no further action by the receiver. In a portfolio of Midwestern restaurants, the health department threatened to close all locations — claiming a review had not been conducted in years. After some research, it was found that the health department reported to the department of revenue and there was a very large amount of unpaid sales tax due. Once the sales tax was worked out between the receiver and the taxing authority, the health department issued a reprieve on the closing — stating they had found misplaced paperwork from a successful inspection just weeks prior to the appointment. In recent years, the enormous volume of distressed commercial real estate assets has fueled a related phenomenon: receiver sales. If a receiver is planning on selling a property in receivership, outstanding tax liabilities will most likely rear their ugly head. Either remaining payments owed under any payment plan will become due in full prior to the close of escrow, or — if the tax liability did not become an issue related to the receiver’s operations — it may emerge without warning right before closing, derailing the entire deal. As an example, a state department of revenue may refuse to issue the purchaser a sales and use permit for a property until the borrower’s past due taxes are paid in full, regardless of who ends up getting stuck with the bill. In other cases a receiver may be required to negotiate down and/or pay in full outstanding tax amounts to have the taxing authority remove a lien that is inhibiting the sale of a property. In New Mexico, even after a foreclosure, the department of Alcohol and Gaming can restrict the ability of the new owner of a liquor license to utilize the license until all outstanding taxes have been paid in full plus penalty and interest. Resolving Liabilities Fortunately, there are many options available to resolve outstanding tax liabilities — ranging from completely paying off the amounts owed to litigation. The receiver can also reach out to the borrower and request that they pay the outstanding taxes directly. Unfortunately most borrowers are not willing to pay such indebtedness and the time lost chasing this money can be costly to operations — or even disrupt the sale. Another option is to return to court. The receiver can ask the court to require payment by the borrower or try to have the court intervene in the dispute with the taxing authority. This option is not ideal, as it will be at an additional expense to the estate and there may be no funds available from the borrower for payment — or the court may not be able to intervene in time. This scenario takes time and if the receiver is not able to operate the property pending the outcome of a hearing, the estate will lose money from the restricted operations. The Tax Man Cometh: Paying Taxes in Receivership “Given the varying circumstances under which receivership may arise, a receiver’s tax obligations can be quite complicated.”


CRE Finance World, Winter 2014
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