Phila. readies to auction 938 tax liens

At the eleventh hour, several community and nonprofit groups are crying foul over the city's plan to auction 938 tax liens - in an online endeavor that is to begin Wednesday and end Monday - in the hope of collecting millions of dollars in unpaid property taxes and related fees.

The sale is for control of a tax lien - essentially a claim attached to commercial and residential properties and vacant lots with unpaid real estate taxes, not the property itself. The auction is a pilot program that could result in other lien sales, according to the Nutter administration.

An auction is just one in a series of tactics Philadelphia has used in trying to deal with its mammoth stock of tax-delinquent properties, now numbering 98,000, about one-fifth of the city's 500,000-plus parcels.

Other approaches have included sheriff's sales and, more recently, creation of the Philadelphia Land Bank, and City Councilman Mark Squilla's auctioning this month - with the cooperation of the Redevelopment Authority and other agencies - of about 90 properties in his district.

The city has tried a tax-lien sale before, with mixed results, as critics pointed out in a June 11 letter to Mayor Nutter.

A sale in 1997 under then-Mayor Ed Rendell used $106 million owed in back taxes as collateral to borrow $75 million for the schools and economic development projects. Private agencies, however, had trouble collecting the taxes, and the city was forced in 2004 to default on $46 million worth of bonds.

"We have heard from neighborhood redevelopers across the city that properties whose liens were sold remained in limbo for years and unavailable for redevelopment because tax balances continued to be uncollectible," read the letter, which was signed by 17 nonprofit and community groups, including Habitat for Humanity Philadelphia, the Pennsylvania Horticultural Society, and the Public Interest Law Center.

The Land Bank, which has been slowly getting off the ground, has also found that properties it would like to acquire are tied up in old and costly privately held liens.

"For the Land Bank to clear those . . . we will have to pay even more than we sold them for," said Jennifer Kates, a Land Bank board member and legislative aide to City Councilwoman Maria Quiñones Sánchez, who also objects to the lien sale.

But in the era of looking under every cushion for coins to help prop up city schools, Council President Darrell L. Clarke has insisted that a tax-lien sale is needed to help fund the district. His office estimates that a sale could generate as much as $30 million for schools.

The administration did not have an estimate on what it expects to earn from the auction, which involves liens totaling $6.8 million.

For the city, the sale has immediate benefits.

First, the city is able to nearly clear years' worth of unpaid property taxes. The minimum bid is for the tax bill and interest, minus penalty fees.

Second, notice of the impending sale has spurred some tax delinquents to clear their debts.

Nutter spokesman Mark McDonald said that after letters went out informing property owners of the auction, more than 500 paid their taxes. The take was $4.7 million.

One of those property owners was the nonprofit Asociación Puertorriqueños en Marcha, which owed $8,461 on three vacant lots across from its headquarters in North Philadelphia. There will be "future development" on those lots, said APM spokesman Rick Olmos. "Something for the community."

The lien purchaser, on the other hand, gains the right to collect the total amount owed and costs associated with collection efforts. The lien holder also gets to collect 9 percent annual interest on the unpaid tax principal.

"Tax-lien buyers make their money off the interest charged against, and the administrative costs added to, the delinquent tax liens," said Sharon Humble, a partner in Linebarger Goggan Blair & Sampson L.L.P., a Philadelphia firm that provides legal services to lien holders.

The lien purchaser only has the right to collect money owed on the lien it owns. After a lien is sold, the city continues to bill the property owner its regular tax bill. If that bill also goes uncollected for more than a year, a new lien may be placed on the property.

Bradley Westover, executive director of the National Tax Lien Association, endorsed Philadelphia's auction.

"It is no secret that the city is on a tight budget these days. Can you imagine the costs to perform collection and foreclosure proceedings on 40,000 properties?" Westover asked in an e-mail. "While they might get the money back when liens redeem, it would consume tens of millions of dollars in the meantime, not to mention the man-hours to manage it all."

The losers in a tax-lien sale are the property owners, whose debt will be owned by a third party whose business it is to collect.

And when a property with liens is sold, those who hold liens will have first dibs on getting paid from the sale revenue.

The Land Bank, created in 2014 as a way to streamline the vacant and tax-delinquent property acquisition and sale process, also stands to lose if lien sales become a common thing.

Because the Land Bank is a branch of city government, it can erase city liens when it acquires property. But if those liens are owned by third-party investors, the Land Bank is on the hook for those liens and associated fees. That's something Kates and other advocates say the Land Bank cannot afford.

"The real danger is the lien sale," Kates said. "If we keep doing it, it will cripple the Land Bank."

Sánchez has asked that the sale be postponed. A quick glimpse of the 240 properties in her district with liens on the auction block show that some have issues, such as mixed zoning, or are community garden sites, and deserve a closer look, she said.

"I believe that it is crucial for us to have more time to review any liens proposed for sale," Sánchez said in a letter to Nutter.

But McDonald said the sale would go on.

Once the liens are sold, the city will send notifications to property owners about whom they owe money to. Once the owner pays the third-party holder, it's up to the investor to notify the city and clear the books on that lien.

Indianapolis-based SRI Inc. will host the online auction on behalf of the city through its Zeus Auction program at www.zeusauction.com.

Clarena Tolson, the city revenue commissioner, said that the auction allows investors to bid on one or all properties. More than 70 investors have signed up to participate.

"This is a pilot, so we're trying a lot of variables," Tolson said. "Once we get results, we will determine what works before we have a large one at the end of the year."

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