Navigating New York's In Rem Tax Foreclosure
By Margaret J. O'Brien
Published in the New York Law Journal
January 16, 2001
In March of 1996 significant amendments were made to Title 11 Chapter 4 of the New York City Administrative Code (the "Code"). Provisions were added to Chapter 4 of the Code entitled "Tax Lien Foreclosure by Action In Rem," setting forth new procedures for the sale of class one and class two properties by in rem foreclosure. Class one and class two properties include all forms of residential real property, except hotels and motels. 1 Most notably, the amended Code now provides for the sale of class one or class two properties from the Commissioner of Finance directly to a qualified third party; 2 for all other properties the old method must be used whereby the deed is made from the Commissioner of Finance to the City of New York. 3 The amendments also define distressed properties and include special procedures for the foreclosure of properties so classified. This article will explore the noteworthy amendments to the Code, with an emphasis on the new procedures for class one and class two properties.
Pursuant to Section 11-404 of the Code as amended, parcels that have tax liens due and unpaid for a period of least one year may be foreclosed by an action in rem. Tax liens on any class one or class two property that is a residential condominium or residential cooperative and on any multiple dwelling owned by a housing development fund company organized pursuant to Article XI of the private housing finance law cannot be foreclosed by an action in rem until taxes have been due and unpaid for a period of least three years. Prior to the 1996 amendments, residential parcels containing no more than two dwelling units, including condominium units, on which the annual tax was not more than $2,750.00 could not be foreclosed by action in rem until such tax was due and unpaid for at least three years from the date on which the tax or assessment became a lien.
The amendments to the Code establish a special category of class one and class two properties known as "distressed property". Section 11-401 of the Code defines distressed property as follows:
"Any parcel of class one or two real property that is subject to a tax lien or liens with a lien or liens to value ratio, as determined by the commissioner of finance, equal to or greater than 15% and that meets one of the following two criteria:
1. such parcel has an average of five or more hazardous or immediately hazardous violations of record of the housing maintenance code per dwelling unit; or
2. such parcel is subject to a lien or liens for any expenses incurred by the department of housing preservation and development for the repair or the elimination of any dangerous or unlawful conditions therein, pursuant to section 22-2144 of this code, in an amount equal to or greater than $1,000."
Distressed properties are included within the same in rem foreclosure procedure as class one and class two properties, with a few additional procedural requirements. The Code now provides that any parcel determined to be distressed cannot be included in a tax lien sale. 4 To establish which properties scheduled for inclusion in a tax lien sale are distressed, the Commissioner of Finance, not less than sixty days prior to the tax lien sale, submits to the Commissioner of Housing Preservation and Development ("HPD") a list of class one and class two properties to be included in the tax lien sale. HPD then determines which properties are distressed and notifies the Commissioner of Finance of such designation not less than ten days preceding the sale. Any property determined to be distressed is removed from the scheduled tax lien sale and may be included in an in rem foreclosure action.
The in rem foreclosure procedure for class one and class two properties (the "New In Rem Procedure") matches the in rem procedure for all other properties (the "Standard In Rem Procedure") until such time as final judgment of foreclosure is handed down, at which point the procedural paths diverge. The Standard In Rem Procedure requires the Commissioner of Finance to convey title to the City of New York; the transfer of title into the City of New York takes place after a final judgment is entered. It should be noted that the role of the Commissioner of Finance in any in rem action is akin to the role of a referee in a mortgage foreclosure action in that he has possession of the properties but does hold title. Under the New In Rem Procedure, the Commissioner of Finance is permitted to convey title to the City of New York or to a qualified third-party. The transfer of title must occur, if at all, no earlier than four months after but within eight months of entry of a final judgment, subject to a tolling of time of up to forty-five days for City Council review, as discussed below. The New In Rem Procedure limits the time within which class one and class two properties may be conveyed by the Commissioner of Finance and, unlike the Standard In Rem Procedure, if the Commissioner of Finance fails to convey any or all of the parcels within the statutory time period then, as to each parcel not conveyed, the in rem action must be discontinued, the lis pendens canceled and the final judgment set aside. The result is that owners, mortgagees, lienors and other encumbrancers are restored to the status they held immediately prior to the entry of final in rem judgment.
HPD determines and designates the qualified third-party. In making the determination, HPD considers factors such as residential management experience, financial ability, rehabilitation experience, ability to work with government and community organizations, neighborhood ties, whether the third-party is a responsible legal-tenant, not-for-profit organization or neighborhood-based-for-profit individual or organization, and such other criteria as are established in rules promulgated by HPD. 5
In accordance with constitutional due process requirements, the City of New York in all in rem foreclosure proceedings must provide interested parties with notice of the foreclosure action 6 and the opportunity to redeem properties from the action by paying all delinquent taxes, interest and penalties due on the property. "Interested parties" include owners, mortgagees and lienors. The Standard In Rem Procedure permits interested parties to redeem at any time from the filing of the list of delinquent taxes up until the time the Commissioner of Finance is notified by the Corporation Counsel that the preparation of the judgment of foreclosure has been commenced. The New In Rem Procedure extends the period of time within which redemption of class one and class two properties is permitted. The New In Rem Procedure permits interested parties to redeem properties from the foreclosure action by paying all taxes, interest and penalties at any time from the filing of the list of delinquent taxes up until four months after the date of entry of the judgment.
Both the Standard and New In Rem Procedures provide interested parties with an opportunity to have properties released from the foreclosure action. As with the redemption procedure discussed above, all outstanding taxes, interest and penalties must be paid.
The Standard In Rem Procedure provides that within two years of the recording of the deed into the City of New York, any interested party may apply to the City of New York for a release of the property. Any application for release made within four months of the filing of the deed must be granted; the City is not permitted to sell or assign any parcel within this four-month period. The granting of applications for release filed after the four-month period but within two years of filing the deed are discretionary; the in rem foreclosure release board has absolute discretion to grant or deny the release of any parcel. Generally, releases will not be granted after the expiration of the four-month period in the absence of fraud or illegality. 7 The two-year limitation period does not apply to readily ascertainable owners who did not receive notice. 8
In comparison, the release provisions of the New In Rem Procedure are more restrictive, offering less time and opportunity to apply for a release. If title to the property is conveyed to the City of New York, an application for the release of the property may be made at any time up to sixteen months from the date upon which the deed conveying title into the City was recorded. As with the Standard In Rem Procedure, any release made within four months of filing of the deed must be granted; thereafter, any release applied for is granted at the discretion of the in rem foreclosure release board. On the other hand, if title is conveyed to a qualified third-party no application for release is permitted.
Every deed given in an in rem foreclosure proceeding raises a presumption that the action was regular and in accordance with the law. In a Standard In Rem Proceeding the presumption becomes conclusive two years after the recording of the deed. In an action under the New In Rem Procedure, the presumption becomes conclusive after four months from the date of entry of the judgment of foreclosure. No action to set aside a deed will be entertained after the statutory periods expire, other than an action brought by a readily ascertainable owner without notice.
Under the New In Rem Procedure, prior to the execution of a deed conveying title to any parcel of class one or class two real property to a qualified third-party, the Commissioner of Finance must notify the City Council (the "Council") of the proposed conveyance. The Council has forty-five days from such notification to disapprove the proposed conveyance by local law. The eight-month period within which the Commissioner of Finance may convey the properties is tolled during the forty-five day period. In the event the Council does not act within the forty-five day period the proposed conveyance is deemed approved.
The new procedure allows for an expedited process on the sale of class one and class two properties by skipping the step of transferring property ownership into the City of New York. The City of New York has implemented this procedure in its ongoing effort to avoid City takeover of owner-abandoned properties, a costly and largely inefficient solution to dealing with abandoned properties.
As discussed earlier, the new provisions of the Code restrict the time within which the conveyances of class one and class two properties may be made. These time restrictions make it impossible for potential purchasers to determine the condition of the properties and obtain the financing needed to purchase and rehabilitate the properties before the time within which the Commissioner of Finance is permitted to convey expires. Additionally, it is impossible to determine which properties will be redeemed from the in rem action until four months after entry of judgment. These factors necessitated the creation of an initial third-party transferee who would act as an interim owner to hold the properties while the aforementioned issues were resolved. In August of 1999 the Commissioner of Finance conveyed title to approximately fifty Bronx properties to an entity known as Neighborhood Restore Housing Development Fund Corporation ("Neighborhood Restore"). Neighborhood Restore, an Article 11 Housing Development Fund Corporation, funded by a seed money loan from the City of New York, was specifically created to facilitate the New In Rem Procedure by acting as the initial third-party transferee. Prior to the time that Neighborhood Restore acquired title to the properties entities interested in ultimately acquiring the properties replied to HPD's "Request for Proposals". Upon reviewing the applications submitted by the interested entities, HPD, with some input from Neighborhood Restore, determined which applicants were qualified third-parties; the criteria used in making this determination were the same as those used to designate Neighborhood Restore a qualified third-party. The entities designated as qualified third-parties took over management of the properties immediately upon Neighborhood Restore's acquisition of title. These qualified third-parties continued to manage the properties until the financing arrangements were completed and they were able to acquire title from Neighborhood Restore.
Since its acquisition at the August 1999 sale, Neighborhood Restore has successfully conveyed many of the properties to qualified third-party entities that are committed to rehabilitation of the sites. Although still in its infancy, this program seems to provide a cost-effective alternative to City takeover of abandoned properties, while at the same time contributing to the rejuvenation of neighborhoods and providing rehabilitated affordable housing to current occupants of the distressed properties. Currently, there is a second sale pending which includes properties in the Bronx and Brooklyn, with a third sale planned for early 2001 involving properties in Manhattan.
1 N.Y. Real Prop. Tax Law 1802.
2 N.Y.C. Admin. Code 11-412.1.
3 N.Y.C. Admin. Code 11-412.
4 See, Title 11 Chapter 3 N.Y.C. Admin. Code; See also, Michael J. Berey, Changes In City Of New York Real Estate Tax Foreclosures, N.Y. Real Property Law Journal, Winter, 1997.
5 RCNY 8-03.
6 Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306; Mennonite Board of Missions v. Adams, 462 U.S. 791.
7 See, Grant v. In Rem Foreclosure Release Board, et al., 640 N.Y.S.2d 227; Swift v. Board of Estimate of the City of New York, 577 N.Y.S.2d 636; Izquierdo v. The Board of Estimate of the City of New York, 529 N.Y.S.2d 91.
8 NYC Admin. Code 11-412(b); See also, ISCA Enterprises v. The City of New York v. Linton Campbell, 569 N.Y.S.2d 927.