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Due Diligence Issues in Commercial Real Estate Transactions, Part I:  Acquisition of a Tax Sale Certificate
By Christopher R. Sullivan on August 22, 2019

Due diligence is a comprehensive and critical component to any commercial real estate transaction.  In this series of articles, we examine (i) what tax sale certificates are and how they are acquired, (ii) their effect on a potential real estate acquisition, and (iii) how buyers may address them during due diligence review. 

Part I:  Acquisition of a Tax Sale Certificate

New Jersey law requires property owners to pay property taxes and other municipal charges relating to their real estate holdings.  These charges can include water, sewer and other special assessments or utilities impacting the property.  In the event a property owner fails to pay its taxes, the property may be subject to tax foreclosure, either by the local government or by a third party who has purchased a tax lien from the municipality.  

The procedures that govern tax foreclosure are set forth in the Tax Sale Law, N.J.S.A. 54:5-1 et seq.  All municipalities in New Jersey that have delinquent taxes on properties are required to hold at least one tax sale per year.  At a tax sale, the local government is not actually selling the properties in question, but instead is selling the tax lien on the respective property (i.e. the right to collect the back taxes from the property owner).  The tax liens sold at auction are referred to as "tax sale certificates" and can earn interest of up to eighteen percent (18%), making them an attractive investment vehicle for certain investors.  At the tax sale auction, bidders bid down the interest rate that will be paid by the owner for continuing interest on the certificate amount.  If the interest is bid down to one percent (1%), bidders will then bid on a "premium" starting at $0 and will continue to rise until bidding for the certificate stops.  In an instance where a premium is bid, the local government will hold the premium as a deposit for a period of up to five (5) years.  If the certificate is not redeemed, or if the property is otherwise foreclosed on during the five (5) year period, the premium will revert to the local government.  If no one bids on a property, the local government retains the lien.

The winning bidder (i.e. whoever bids the lowest percentage of interest or the highest premium) must immediately pay to the local government the taxes and interest due to date on the property.  In exchange, the local government will provide a tax sale certificate to the winning bidder.  It is critical that the winning bidder record the tax sale certificate with the County Clerk in order to protect its interest in the certificate.

In upcoming articles we will discuss what a certificate holder must do to maintain its security interest in the certificate, the rights of property owners and what potential purchasers of real estate can address outstanding tax sale certificates prior to taking title to the property. 

Attorneys in Parker McCay's Corporate and Real Estate practice groups handle a multitude of issues surrounding the sale, purchase, lease and financing of commercial, industrial and residential real estate. 

The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.

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