Typically, an owner of commercial real estate that has failed to make its mortgage payments to its lender also has failed to make its real estate tax payments to the county treasurer (assuming no escrow). When the taxes become delinquent, the real estate can become eligible for a tax sale. (The statutory scheme for Indiana tax sales is located at Ind. Code 6-1.1-24.) Tax sales are not good, and I’ll expand on that point another day. Today’s post provides a tip to mortgagees on how to learn about, and avoid, their real estate collateral from being sold out from under them.
Super-priority. Because a secured lender’s first-priority mortgage lien suddenly can be subordinated by a tax sale in Indiana – or even negated after a period of time - it is important for lenders/mortgagees to monitor the status of the real estate taxes on their loan collateral and take action (read: advance the taxes), if warranted. Although the lender can redeem, the expense for redemption is greater than the payment required to avoid the tax sale in the first place.
Owners only. The problem is that, in Indiana, only borrowers (mortgagors), and not lenders (mortgagees), automatically receive notice of an upcoming tax sale. See, I.C. 6-1.1-24-4. This makes monitoring the status of the real estate tax situation challenging for lenders, particularly when dealing with uncooperative borrowers.
Written request. The Indiana Code does, however, provide a mechanism for mortgagees to receive certain notices. I.C. 6-1.1-24-3(b) deals with notices of the sale:
At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice.
I.C. 6-1.1-24-1(d) similarly provides for the mailing of a list of properties eligible for sale:
Not later than fifteen (15) days after the date of the county treasurer's certification under subsection (a), the county auditor shall mail by certified mail a copy of the list described in subsection (b) to each mortgagee who requests from the county auditor by certified mail a copy of the list.
So, if the mortgagee, on an annual basis, sends the required letter to the county auditor requesting tax sale information, the mortgagee should automatically receive written notice of both the property’s eligibility for a tax sale and of the date of the tax sale itself.
No guarantee. Please note that both sections 3(b) and 1(d) contain language stating that the auditor’s failure to provide the requested notice will not invalidate an otherwise valid sale.
Cost/benefit analysis? Whether the benefits of receiving the statutory notices exceed the costs (time and expense) of sending the annual letters is unknown to me. The important point is that the option is available should mortgagees choose to utilize it. Otherwise, lenders will need to be proactive with both the borrower and the county treasurer to ensure that the taxes are being paid and, if not, to determine when the tax sale is scheduled. I welcome comments or emails from anyone who has had experiences with the statutory letter requests, particularly any comments on how effective they’ve been in monitoring for tax sales.