Monday, December 11, 2006

Everything You Wanted to Know about the City Lien Buyback (and were forced to find out)

Rich Lord made an attempt at it here, and there are discussions going on here and here about what it all means. I was going to make a substantial post at these places, trying to sort the whole discussion out, until I realized that I was exceeding my 10,000 characters post limit. So, I went and bugged my Real Estate, Economic Development, and Tax cronies and tried to pry as much information out of them as I could over several cases of beer. Anyway, I'll try to be as susinct as possible and answer the questions as best as I can.

Question: What the hell is going on here?

Answer: The City is buying back $64,000,000 worth of tax liens that it sold to Capital Assets Research Corporation (CARC) back in the late 1990s.

Question: Um... OK, what the hell is a lien?

Answer: Well, to be simple, in law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation.

Question: Can you dumb it down a bit?

Answer: OK, the primary lien you'll usually see is a mortgage, which is held against a property by a bank or some other lending institution. The bank, essentially, owns a portion of the property until it is repaid. Usually the transfer of property is held up until the lien is paid off, or satisfied.

Question: So, wait, the City owns my mortgage?

Answer: No, other things are "lienable," like criminal judgements, publicly undertaken demolition, water & sewer bills, and property taxes.

Question: OK, so what does CARC have to do with this?

Answer: Ah! Here's the big question. Think of a lien as a source of income for the City. It is, in effect, an Accounts Receivable and, for that reason, has some worth. Like most things, if you can assign a value to it, you can sell it, which is what the City did. In exchange for $64,000,000 (which was needed at the time), the City gave the right to collect these back charges to Capital Assets.

Question: Wait, why'd CARC want to do that?

Answer: Because CARC thought they could make money off the collection of these liens and any interest that accrued.

Question: Did they?

Answer: No.

Question: Ah.

Answer: Yeah, see usually when a company does something like buy a portfolio of liens for $64,000,000, they should expect to get at least $64,000,001 (NPV) back. In the world of liens, that means that Capital Assets thought that it could collect more than the amount it paid to the City, thereby making a profit. It couldn't and it didn't.

Question: So basically, CARC made a bad investment. Boo friggin' hoo. Why does this matter?

Answer: Well, put it this way: they want their damned money and their not releasing their lien until they get paid.

Question: So?

Answer: CARC hasn't been willing to get less than what they're owed on these liens, but the value on these liens are so high that it discourages developers from satisfying these liens and purchase the properties.

Question: So basically rather than getting something for the properties, CARC has opted to take nothing until it gets everything?

Answer: That pretty much sums it up.

Question: Isn't that bad business?

Answer: Well, yes, but what makes it worse is that CARC's parent company MBIA, Inc. used the portfolio to secure, in part, a huge bond issuance.

Question: Meaning...?

Answer: Meaning that it's worse than just not getting revenue for MBIA; it means that they could default on debt.

Question: OK, so why is the City doing this then?

Answer: This is the long part. You may want to make yourself comfortable.

Question: I'm all comfy now.

Answer: Basically, the portfolio that CARC pick up was "non-performing", meaning in this case that the revenues didn't actually come in to the Corporation. What's worse, however, is that the current taxes (not sold to CARC, and still due to the City) aren't being paid either. I suppose people figure that either (a) there's no way to pay them off, (b) they don't care about them being paid off, or (c) they're dead.

Question: Dead?

Answer: It's very hard for the dead to keep current on their taxes. Now stop it, you're interrupting.

Question: Sorry.

Answer: Anyway, across the City, you have all these tax delinquent properties that the City could make available for development via Treasurer's Sales (i.e., they'll sell your property to themselves unless you pay up), but it can't because Capital Assets won't allow the transfer to happen until they're paid up.

Question: Wait, so my bastard neighborhood Jim who always dumps his leaves in my yard can have my property taken by the City and get it sold to him?

Answer: You're interrupting again! And no. You need to be several years delinquent, you need to be notified, there are advertisements in the newspapers, and you'll ultimately have a chance to repay the taxes or get on some tax plan. Although, if you think you're at risk, you may want to consider, you know, paying your taxes. Where was I?

Question: Treasurer's Sales.

Answer: Oh yeah, so eligible, non-profit community development corporations (CDCs) can apparently request that the City acquire tax delinquent properties through the Treasurer's sale process if the CDCs can prove that they will be using this property to improve it and make it income generating again.

Question: And CARC is stopping that transfer?

Answer: By Jove it think you've got it! Now put it together...

Question: Because CARC is holding off the satisfaction of these liens, Community Development Corporations haven't been able to assemble vacant property and return them to productive use?

Answer: There you go!

Question: So is the $6.4 Million price tag worth it?

Answer: Pardon?

Question: Is the $6.4 Million price payoff to CARC worth it?

Answer: Well, that is the $6.4 Million Question.

Question: That's a really lame pun, you should be ashamed.

Answer: Sorry.

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