Friday, December 08, 2006

on tax liens

The news that the city is going to buy back most of the tax liens it sold off in the 90's is about as good a story as there is these days for the city these days. While I know the effort to buy back the liens has been something being worked on since BO came to office I still am a little curious about the timing. I wonder if/how much MBIA came down in price once the Bloomberg article came out putting them in such a bad light. Just as companies will clearly pay to advertise and build their brand, they will also pay to avoid bad PR and this was looking pretty bad for them.

Lots of interesting angles to the whole history of the tax lien sale. The city actually wound up making a pretty penny off the deal. Buying back the liens at a fraction of their nominal value isn't so surprising. The strange thing was that anyone thought the liens were worth that much to begin with. MBIA learned the hard way that these were not performing debts and had clearly written off most of the debt on their books already. The original deal was clearly overpriced and in a certain sense, the city got a good deal. Almost a classic example of imperfect information given the subsequent court rulings that hurt the value of the lien holdings. In the end it seems the city made 60 million of the whole deal. Not only that, but the 6 million being spent to repatriate the liens is probably not a net loss. Some of these liens will be performing, at least at 10 cents on the dollar which could get the cost to breakeven. The city could actually record a gain out of all of this.

A colleague asked me why all of this really matters. How could tax liens really hold up development. If the demand for these properties was really out there, someone would have been willing to buy these properties and pay off the liens. If so, getting rid of the liens is not really that important. Maybe so but it gets to a fundamental question of why city land markets do not clear. The existence of so many vacant and underutilized properties is evidence that it does not clear entirely and that is the problem. Once MBIA or its predecessor started holding up transactions until the liens were paid, the value of the liens had to be fully capitalized into sales prices. Some of the examples in the press are a little extreme, but where tax liens exceeded market price you would push the nominal market price of some properties into negative values. That does not usually work: not too many residential owners are going to pay you to take property off of their hands. As mentioned in the article, many of the property owners owing these taxes were deceased and death is what we call a transversality condition.


Anonymous Anonymous said...

Whoops. Just lost a long comment. Many points were made. Clarity not spared. Best point I made, in my opinion, was that properties should be auctioned in clustered. Financing and legal advice should be available to loose syndicates or compacts.

Saturday, December 09, 2006 11:51:00 AM  
Anonymous Anonymous said...

Did I say "clustered"? I meant "clusters." Am obviously befuddled now.

Saturday, December 09, 2006 11:53:00 AM  

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