July 3, 2022
On Tuesday night the city council briefly discussed tax title sale auctions in response to a motion by Councilor Kim Scott requesting an update. Here is what City Solicitor Christine O’Connor wrote in reply:
In 2011, the City’s Tax Title Division joined the Law Department. That year, the City held its first municipal lien auction pursuant to MGL c.60, §52. Pursuant to the process, properties in tax title are bundled and sold to the highest bidder. Prior to the auction, owners of these properties receive two separate notices of the upcoming auction. Additionally, a notice of the auction is published in The Sun. Property owners receiving an elderly, widow, hardship, or veterans exemption, are not included in the auction.
In light of certain economic hardships resulting from Covid-19, the City delayed its annual auction until this year. At this time, it is anticipated that an auction will be held in the month of October and would include takings in 2019, 2020, and 2021. While past auctions have generally exceeded an initial bundle of 300 properties, this year we anticipate that close to 500 tax title liens will be sold.
The law of tax liens in Massachusetts is complicated. A city or town has an automatic lien on real estate for unpaid property taxes. This lien has priority over all others including mortgages. The lien is potentially infinite in duration, however, if the city does nothing and the property is sold by the delinquent taxpayer to a third party, the lien expires 42 months after the taxes were first assessed.
To “perfect” the lien, the city must “take” the property for nonpayment of taxes. That’s done by first publishing a Notice of Taking in the local newspaper and then recording the Notice of Taking at the registry of deeds. The term “taking” is a little deceptive since the property owner retains possession of the property. The taking is a little like a mortgage. When you have a mortgage, the lender holds “title” (which is a concept of ownership, not a physical thing) while the homeowner holds the right of redemption. In the case of a mortgage, you redeem the property by paying the loan; in the case of a tax taking, you redeem the property by paying the outstanding taxes and charges.
What if the property owner doesn’t pay the outstanding taxes? The city can proceed to the next step which is to cut off the property owner’s right to redeem the property. The city does this by filing a Petition to Foreclose the Tax Taking in the Land Court. The Court sends notice to everyone with an interest in the property and then holds a hearing. If the property owner either doesn’t respond or shows up but is found liable for the taxes, the Court issues a judgment for the city.
Even after the judgment, however, the homeowner still has a year to petition the Court to vacate the judgment. The decision to vacate the judgment is entirely in the judge’s discretion so the property is not “marketable” – meaning no one would buy it - until a year passes from the date of judgment. At that point, the city’s ownership of the property would be absolute.
For many reasons, this process is not attractive to cities and towns. It’s cumbersome, labor intensive and lengthy, and even if successful, the city is left owning the property and still hasn’t gotten the money for the outstanding taxes. Consequently, the law gives the city the right to auction off tax liens to a third party early in this process. This gets the city money in hand while leaving the legal work to the entity that bought the tax lien.
As practiced by the city of Lowell, tax takings are bundled together and auctioned off in big batches rather than as individual properties. This streamlines the auction but also ensures that unattractive properties are sold in a package with more attractive ones. In recent tax auctions in Lowell and across the Commonwealth, the high bidder tends to be a limited liability corporation (LLC) set up by lawyers who specialize in this area. (The LLCs that have done business in Lowell are Tallage Adams and Tallage Lincoln but the same people are behind them both).
After the auction, the LLC as high bidder pays the city the amount bid which the city applies to the unpaid taxes. In return, the city creates and records at the registry of deeds an Instrument of Assignment for each property, making the LLC the owner of the tax taking with all the rights and powers that would otherwise be held by the city. The LLC then files and prosecutes the tax lien foreclosure case in the Land Court.
After the hearing, the judgement, and the passage of the waiting period, the LLC becomes the absolute owner of the property free and clear of any other liens. In other words, if the original homeowner owed $500 in taxes on a property worth $100,000, the LLC would end up owning the $100,000 property outright with nothing further owed to the original homeowner. Contrast this to a mortgage foreclosure where any excess money obtained in the foreclosure sale goes back to the homeowner.
Going back to the Great Depression, instead of aggressively pursuing tax lien foreclosures, municipalities in Massachusetts tended to record tax takings and then allow them to linger as liens until a change in circumstances caused the back taxes to be paid. However, this meant that the tax revenue anticipated from a property in the current fiscal year was not received until some future date. About a decade ago, many municipalities in Massachusetts began holding tax lien auctions that converted tax liens into cash in the current fiscal year. While beneficial from a fiscal perspective, this also transformed the tax taking process from something tempered by a variety of public policy considerations into a private for-profit business which inevitably will lead to legal but occasionally inequitable outcomes.
Since July 1, 2019, the city has recorded 701 tax takings at the registry of deeds: 237 in FY20; 267 in FY21; and 197 in FY22. Some of the delinquent property owners have paid up and the takings have been discharged but many remain unsatisfied. In the past, whenever the city schedules a tax lien auction, a substantial number of delinquent taxpayers respond and either pay the amount due or enter into payment plans with the city. Inevitably some properties remain in default so it’s likely there will be a big batch of tax liens when the city schedules its next auction sometime this fall.
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Real estate was also the topic of a joint meeting of the Council’s Housing and Zoning Subcommittees held earlier Tuesday evening. Councilors John Drinkwater and Paul Ratha Yem are the chairs of those two committees and Councilors Vesna Nuon and John Leahy are members. The topic of this meeting was Accessory Dwelling Units or ADUs.
An Accessory Dwelling Unit is a “self-contained apartment in an owner-occupied single-family home or lot that is either attached to the principal dwelling or in a separate structure on the same property.”
The “Smart Growth” page on the state’s website had a pretty good explanation for why Accessory Dwelling Units are now being looked to as part of the Commonwealth’s housing strategy:
The census shows that the average number of people per household has decreased significantly over the last 30 years (from 3.1 in 1970 to 2.6 in 2002). Yet, new homes continue to be built, suggesting that there is increased capacity in the existing housing stock. This has occurred while the value of homes and the resulting tax burden continues to rise. Homeowners are often forced to sell a house that is too big for their needs, especially for fixed income residents. This issue further aggravates the already existing scarcity of affordable housing options, and the land consumption and new infrastructure required for a standard single family subdivision are significant. ADU's can provide owners the additional income necessary to maintain a home when the structure becomes more than they need or can afford.
A household may wish to provide a new self-contained unit within their property to receive additional income, provide social and personal support to a family member, or obtain greater security. However, this practice is often unlawful because of basic zoning restrictions on the allowed number of units per lot.
New, young workers in a community may decide that home ownership is a longer-term goal, and a smaller rental apartment is more appropriate now. When apartments become harder to find in a community, these workers may have to live outside of the community and away from their families.
ADU's can allow homeowners to provide separate units that fit in the neighborhoods and to increase options and affordability for both homeowner and renter or family member, and not affect the quality and physical character of the neighborhood.
Accessory Dwelling Units are rare in Lowell, mostly because the current zoning code strictly limits them to only a few parts of the city. However, with housing prices rising beyond the reach of many residents and with the state linking desirable grants to allowing at least some ADUs, the city council is motivated to explore making ADUs a bigger part of the city’s housing strategy.
About ten residents spoke at the subcommittee meeting. Almost all were non-committal to ADUs but stressed proceeding cautiously and slowly with any policy the council may adopt. Perhaps the biggest concern was parking.
Parking is a challenge that transcends the ADU discussion. One of the principals of “smart growth” is to reduce the number of parking spaces required for residences. The basis of that opinion is that many people will take public transportation, ride a bicycle, or walk, so cars will not be as essential and fewer people will own them. I understand the logic of this and agree with it, but it collides with the reality of life in Lowell. Many of our residential neighborhoods were constructed before cars existed so the houses are close together and lack the driveways and garages that are standard equipment with more recent homes in the outer neighborhoods. And while Lowell does have the LRTA and its buses, few people use it. The same is true with bicycles. Every so often the city will try harder to promote transportation that doesn’t involve privately owned automobiles, but then will grow tired of the effort and abandon it only to start over again a few years later. I do think trying to shift people away from cars is the right approach but there has to be a long-term commitment to it. Hopefully that will re-emerge as part of the coming ADU discussion.
In his closing remarks on Tuesday night, subcommittee co-chair Drinkwater said that this meeting was just the first step in multiple subcommittee meetings and that the council would follow an incremental, inclusive process. As a next step, he requested that the city’s Department of Planning and Development draft a proposed ordinance on ADUs with that draft serving as the starting point for future discussions. That request was endorsed unanimously by the subcommittee which will meet again later this month.
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When the Federal Reserve raised interest rates two weeks ago there were many stories about the adverse impact that will have on the real estate market. That is definitely the case but the real estate market in this region has been slipping for months. For the first six months of 2022 in the Middlesex North Registry of Deeds district (which is Lowell and nine nearby towns), the overall number of documents recorded was down 27% from the same period last year. The number of deeds recorded was only down 8% but the number of mortgages was down 45%.
In past real estate downturns, a slowdown in the number of mortgages has been a leading indicator of a slowdown in the overall market so this big drop in mortgages is not a good sign. Corroborating the bad news is an increase in the number of new foreclosures. When the price of real estate is rising, there are few foreclosures since if a property owner falls behind on their mortgage, they can sell the property as a last resort and, because the value of the property has increased since the mortgage was obtained, get enough money from the sale to pay off the mortgage. However, if home values decline, as they likely will with interest rates rising, a property owner who falls behind on mortgage payments may not be able to sell since the value of the house is less than the amount owed on the mortgage. This gives the homeowner fewer options and foreclosure becomes more likely.
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Happy Independence Day! Tomorrow on richardhowe.com we’ll take a look at how the Fourth of July was celebrated 100 years ago. Today on the site we explore a forgotten memorial plaque recently discovered during the renovations at Lowell High School.