REQUIRED READING: Reduce Liabilities With Property Tax Management

Written by Lori Eshoo
on April 15, 2009 No Comments
Categories : Required Reading

commercial real estate finance sector has undoubtedly suffered during the past year[/b]. Commercial mortgage lending by banks, life companies, commercial mortgage-backed securities (CMBS) and other sources fell from $90 billion in the third quarter of 2007 to net zero in the fourth quarter of 2008, according to Foresight Analytics. The industry will most certainly experience another critical year with substandard results, as the economy faces uncertainty and the credit crisis continues to threaten the lending industry. As the deteriorating commercial real estate market follows the same fate as the residential sector, one area of business that requires full attention from lenders, servicers and property investors to effectively manage overhead and keep expenses at a minimum is property taxes. For many organizations, managing property taxes is a time-consuming and difficult task, but it is a necessary element in handling a successful real estate transaction. Thus, more and more lenders, servicers and investors are taking this substantial responsibility and outsourcing this undertaking to a third-party vendor that specializes in property tax administration. Unlike residential mortgages, commercial loans can become quite complex, as they may involve multiple taxing entities and dozens of properties located within several different states. Thus, lenders and all relevant parties should handle commercial loans meticulously, be aware of all requirements and anticipate any issues before the payment due dates to avoid losses. Issues that commercial lenders and servicers come across at times may involve taxing jurisdictions presenting changes to payment requirements or tax due dates, or even consolidating taxing entities, which are unquestionably pertinent details that a company should frequently verify. Whether changes within a jurisdiction are due to budgetary obligations, tax appeal events or other reasons, considerable monitoring of these components is essential for minimizing costs and maximizing savings. With loan balances in the tens or hundreds of millions, a missed payment could be costly, as penalties are assessed at an average rate of 1.5% per month by many of the taxing entities. Unless a company has the dedicated resources to continuously communicate with thousands of taxing entities across the country and provide updates on all significant changes, using a knowledgeable vendor may be a more efficient method of managing property taxes. Many vendors will take liability in their own hands and pay penalties and interest should they miss a payment for the loans they service on behalf of the lender or borrower. Additionally, vendors can provide servicers and lenders the tools and technology that enables them to have control over their investments without much effort on their part. They may also have established long-standing relationships with the taxing entities and have the expertise to gather detailed tax information in the most optimal method available. Due to the current economic crisis, taxing entities may not be as accommodating as they have been in the past with taxpayers on circumstances relating to penalties and refunds. However, taxing entities may be more flexible with parties that have developed a rapport, accumulated a sense of influence and familiarized themselves with one another's processes. Vendors can also troubleshoot various other issues that may arise in the jurisdiction, which may save lenders and servicers a considerable amount of time and money. Not only is collecting current tax information and tax status critical in keeping a company's expenses down, gathering delinquent tax data for prior years is also key in the overall management of property taxes. Investors should further investigate and verify that liens have not been placed on the property to avoid impediments that may be forthcoming. Lenders are advised to work with experts – title companies or property tax vendors – in obtaining detailed current and prior property tax data to secure their investments properly. Commercial loans, while not suffering as severely as those in the residential mortgage market, have been experiencing delinquencies at an increasing rate. Whether property tax management is completed through a company's tax department or a third-party vendor, monitoring delinquent taxes for non-escrowed and escrowed loans is imperative. The consequence of a loan's entering into a delinquent status may have dire effects on all parties involved in the transaction. Should a loan become delinquent, the lender's cashflow will be interrupted and its reinvestment income will be reduced. Obviously, the negative outcome for borrowers is that they may lose the property to the lender should they be unable to continue paying their mortgage or property taxes. As with property taxes, many companies are also engaged in services that require the payment of sales taxes. For companies that wish to streamline their processes even further, they may want to consider engaging their property tax vendor for payment processing for sales tax as well. The payment procedures for both types of taxes are similar and may allow organizations to focus on other functions that are more vital to the success of their business. Although the commercial real estate market is forecast to produce insufficient volumes this year and possibly the next, positive outcomes are possible with the appropriate strategies implemented and resources allocated throughout the company. Lenders, servicers and real estate investors can better manage their risk and reduce losses by keeping the status of tax obligations clearly in focus. Also, by accelerating tax-monitoring schedules and more frequently reviewing tax payments on mortgage loans, servicers are on the right track to protecting their investments. [i]Lori Eshoo is president and CEO of National Tax Search LLC, a majority women-owned business based in Chicago that provides comprehensive commercial and residential property tax management, tax certification and sales tax payment processing services. Eshoo can be reached at (312) 233-6440 or lori.eshoo@nationaltaxsearch.com

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