Lien Times

For the board members of a midtown condominium, the surprise lay hidden in a refinancing. It was big, and it was scary: a water lien that nestled "in the several hundreds of thousands of dollars," recalls the building's attorney, Steve Goldman, a partner with Brown Raysman Millstein Selder & Steiner. The bill hadn't been paid in almost a decade, a fact that wasn't discovered until the title search. These were cumulative charges that kept building up, and though the offending water meter had long since been turned off, the late charges had continued to accrue. Fortunately, recalls Goldman, "We were able to take care of it. It took awhile, but the city was in error."

"I've seen this before," reports Jeffrey Schwartz, a partner with Wolf Haldenstein Adler Freeman & Herz. A co-op or condo board is rolling along and suddenly its building is hit with an enormous bill out of the blue by the city's Department of Environmental Protection (DEP). "They wake up," says Schwartz, "and start to bill you."

In the rush to take advantage of lower mortgage rates, prospective unit-owners running title searches are turning up thousands of previously unknown liens. Unpaid tax and water bills can quite quickly become a problem. And a serious one at that. Warns James Samson, a partner with Bangser Klein Rocca & Blum: "You don't pay your taxes, you have a lien. Water and sewer charges - they become a lien against the property. Immediately. The city does not wait long."

According to Robert Roman, a spokesman for the city's Department of Finance (DOF), condo and co-ops are considered Class 2 properties. It takes three years of unpaid real estate taxes before a lien is placed against a condo unit or a co-op, after which the lien becomes eligible to be bundled and sold to a trust, which in turn hires a private company to recoup the overdue real estate taxes.

Roman stresses that DOF sends out three separate notices to the residential owner before the property is added to the lien sale list. The sale does not mean the property has been foreclosed on, but it can lead to eventual foreclosure.

If a lien is sold, the biggest immediate threat to the co-op or to the condo unit-owner is that the late fees double immediately. While DOF charges an annual nine percent interest on outstanding tax bills, after the lien is sold, the collection company charges an annual eighteen percent interest, compounded daily. If the taxpayer does not pay the full amount, the lien-holder can eventually foreclose on a property and sell it to someone else, according to the finance department's website.

So what's a board to do?

First things first, don't panic. Boards can go on-line at the Department of Finance website, type in the address of the property, and find out how much the building owes in back property taxes and water bills, and then direct the managing agent to pay them.

Burton Wallack, president of Wallack Management, says his company frequently monitors the DOF's website and sends warning notices to condo owners who may have missed a property tax payment. In condominiums, individual unit-owners pay property taxes but the water bill is paid out of the common charges. In the case of co-ops, the maintenance charges pay for both the property taxes and water bills.

Unpaid water bills in any amount are liens against the property, explains Natalie Millner, a spokeswoman with the city's Department of Environmental Protection. "Which means that if a property is having a title search today, and the bill is delinquent (unpaid for 30 days) it must be paid to get clear title." If the building's property taxes are sold in a lien sale, "then unpaid water and sewer charges of any amount are added to the unpaid tax balance."

Mark Schwartz, president of New York Water Management, which investigates the payment of property taxes and water bills for co-ops and condos around New York, says that the city's website often does not reflect the current bill balance. Schwartz, who is managing the water bills for the Columbia condominium on the Upper West Side, says the condo had just recently adjusted its outstanding balance after waiting two years for DEP to read the new water meters it had installed. In the two years' time, the water bill had shot to $200,000. The condominium had paid the bill and was waiting for the adjustment to be posted, says Schwartz. "We just got it sorted out. The credits should be posted any day."

In the rare event that the tax liens on a co-op or condo are sold, it is even rarer for foreclosure proceedings to begin. Barbara Epler, a spokeswoman with JER Revenue Services, a Connecticut-based tax lien company that does a booming business collecting back taxes from delinquent taxpayers, estimates that since the company began doing business with New York City in 1996, JER has collected $880 million in delinquent taxes. Of the residential properties JER has sought back taxes from, 1,241 were residential condos and 24 were co-ops. Of the condos, foreclosure proceedings were started on about half of the properties; but to date, the company has foreclosed on less than 65. Of the 24 co-ops, 22 paid before a foreclosure was initiated and the remaining two "paid after we initiated foreclosure," says Epler.

Roman says that the finance department has done considerable outreach to make sure homeowners know what their responsibilities are regarding real estate taxes, holding workshops at the offices of the borough president in each borough and making its website user-friendly. Property owners can go to the website - www.nyc.gov/html/dof/html/nycserv_tax_epayment.html - and type in their address to learn whether they are current in their taxes. To check the status of the water bill, property owners will also need the water bill account number in the upper right-hand corner of the bill. If homeowners have questions, they can also contact DEP customer service at (718) 595-7000 or the city finance department at (718) 935-9500. The DOF also sends out warnings before liens are sold, giving owners 60 days' notice, 30 days' notice, and then 10 days' notice before the properties are placed in a sale.

But at the end of the day, the burden of knowing whether the co-op or condo is current with the city is the responsibility of the co-op board and individual condo owners. "The key is not to ignore them, the key is to pay them," says Goldman about outstanding water and tax bills. Once the outstanding property taxes become a tax lien, "it becomes an in rem [civil forfeiture] proceeding and that's when it becomes difficult to deal with. And very expensive."