Delinquent Property Taxes on SBA Collateral: What to Check

Unpaid property taxes are the quietest problem on an SBA file. There is often nothing recorded to trip over, the borrower may not mention it, and the amount looks small next to the loan. Then it turns out to be senior to everything you were about to record, and the fix has to happen before funding rather than after. Our guide to lien position on SBA loans covers the stack generally. This is the one line in it that does not follow the usual rules.

A tax lien does not wait its turn

Nearly everything else in a title report takes priority from its recording date. Real property tax liens generally do not. In most states they arise by statute when the tax is assessed and are given priority over previously recorded interests, which means recording your mortgage first buys you nothing against them.

The practical consequence is straightforward. A first lien position certified over an open tax delinquency is a first lien position behind the taxing authority. That is not a technicality on a small balance, because penalties and interest on delinquent property taxes accrue at rates set by statute and can be considerably higher than the note rate.

Priority rules are set state by state and they do vary, including how special assessments and municipal charges are treated. Confirm the rule where the parcel sits rather than the one you are used to, and let counsel resolve anything that looks unusual.

Two offices, two answers

Tax information does not live where recorded documents live, and that is the detail that catches people.

The collector or treasurer holds the account: what is due this year, every delinquent year, penalties, any installment arrangement, and special assessments. The recorder holds what was filed against the land: tax sale certificates, statutory notices, tax deeds, municipal liens where local practice records them, and releases once they are filed.

A parcel can be three years behind with nothing recorded about it at all. So a search of the land records can come back clean and be entirely accurate while the tax account is a serious problem. Ask for tax status alongside the search rather than inferring it from an empty index. Which office holds what, and what gets recorded, varies by county.

How a delinquency escalates

Early on, the problem is money. Taxes are unpaid, penalties accrue, and a payoff figure closes the file.

Later, a third party enters. Depending on the state, the taxing authority sells a certificate or sells the lien, and someone other than the county now holds a senior claim, usually with a statutory return attached. Redemption still works, and it costs more.

At the end of the road a redemption period expires and a tax deed can issue. Junior interests, including a recorded mortgage, may be extinguished in that process. Timelines, notice requirements, and redemption rights differ substantially by state, and which stage a given parcel has reached is a question for counsel working from the collector’s records.

What to order, and when

Ask for tax status with the search on every file, not only where you suspect a problem. Where a delinquency exists, get the full payoff broken out by year with penalties and interest through a date certain, decide in writing who pays it and when, and confirm the payment cleared before the mortgage records. A payoff quote is not a satisfied lien.

Because the amount moves every month, timing matters. Our note on the pre closing update applies here with more force than usual, since a delinquency can also grow between your search and your closing. Matching all of this to what the funding letter requires is the last step.

The takeaway

Treat unpaid property taxes as a senior lien rather than a payable, verify the account with the collector instead of reading the index alone, and get the release confirmed rather than promised. Start the order online, or send us the funding letter if you want the scope matched to the requirement before anything is ordered.