A foreclosed property has a serious impact on its occupants as they go through the anxiety of financial distress and eventual eviction. A secondary and significant effect is the toll that this process takes on the surrounding neighborhood and even the city. Foreclosure properties are less likely to be maintained which results in the decline of the appearance of the street. Under the “broken window theory” the deterioration will spread into the entire area.
A neighborhood with foreclosures is already under financial pressure as values drop, and is often under strain by job losses which are behind the foreclosures. The local community will also realize higher costs to its municipal budget. Police calls to these neighborhoods will increase and support programs will realize greater applications for financial assistance. Vacant properties need more outside attention just to keep them viable, whether from neighbors or local government. Some servicers report that between 10 and 20 percent of properties are vacant at the time they initiate foreclosure, and by the completion of a foreclosure sale, about 40 percent to 50 percent are vacant.
Of course all of these costs are hitting at the same time that property tax revenues is declining. County budgets often rely of property taxes for most of their income. “Because of the time it often takes for property assessments to reflect falling home values, the bust that began in 2007 has just begun to ravage tax revenue in communities nationwide. The problem is unlikely to subside soon” the Seattle Times reports. “many local governments weathered the early years of the financial crisis in part because the property-tax revenue they rely upon so heavily held steady or increased as a result of assessments that still reflected inflated prices. Many municipalities now are being forced to recognize the collapse in home prices and the shrinking tax base that comes with it. At the same time, they are seeing state and federal aid dry up.”
I believe that municipal budget problems may be one of the most serious problems to be faced in the coming years. Since 2007 this issue has been a concern in many financial reports but has not been a mainstream issue. Some recent developments have been reported here.
In the commercial property market some building owners have created a mechanism to evade property taxes on expensive properties. One such scheme was discovered almost by accident and has resulted in many counties wondering how many more scenarios are out there. Properties are normally reassessed when there is an ownership change, and taxes go up accordingly. Commercial properties are often owned by a corporation rather than an individual so that the ownership transfer can be concealed by simply changing the shareholders of the corporation rather than titling the property in a new corporate name. This is supposed to be reported to the tax assessor but when millions of dollars are at stake there are sometimes methods to avoid this.
In a San Francisco case, billion-dollar companies conspired to conceal a skyscraper’s change of ownership, depriving the city of millions of dollars in tax payments. The scheme was sniffed out not by proactive city employees but private attorneys litigation the case of a terminated lease between the large complex and a small sandwich shop. The case plodded through court for nearly 18 years, spinning such a convoluted web of litigation that, at one point, the city sued itself. The article is a fascinating story in itself, and the underlying method of tax avoidance is troubling. The story describes how the building was transferred without triggering an ownership change: ”They dotted every I and crossed every T to ensure they had 100 percent complete control of the property, even though there was no deed in their name.”
The City eventually was paid $23 million after 20 years of dispute and a series of chance discoveries triggered by the complaints of the disgruntled sandwich-maker and legwork undertaken by private individuals — which city employees initially blew off. Government agencies which were interviewed for the story report that their budgets do not provide enough manpower to audit building records to discover more tax revenue for their budgets.
