Op-Ed | Lien on me: property tax foreclosures as affordable housing strategy

As calls for a freeze on rent increases for regulated apartment buildings in New York City gain political currency, fears of a return to the abandonment of the 1970s have grown. New York is a very different city from when Mayor Ed Koch was faced with upwards of 100,000 properties having been  foreclosed on for property tax arrears — but current rates of delinquency are on the rise.

Multifamily owners are squeezed by limitations on rent increases baked into the 2019 Housing Stability and Protection Act,  rising interest rates, and costs for insurance, among other things. Banks are increasingly aggressive about moving mortgage default buildings from special servicing to foreclosures.

Failure to pay property taxes is often a last resort for a landlord after deferred maintenance has taken its toll and mortgage payment defaults. However, property tax liens have legal priority over mortgages and the department of finance has less discretion to fashion a workout than a private lender.

Before 1996, tax lien foreclosures were common and the city was forced to step into the landlord’s shoes to pay necessary expenses and make repairs. The Koch housing plan set out to address the problem by a combination of city investment, loans and transfers to not for profit organizations and in some cases private developers. Over the course of a decade, and at a cost of over $5billion, some 250,000 units of housing were built or rehabilitated.

Mayor Rudy Giuliani’s administration took a different approach, creating  a program by which property tax liens were sold, generating  a revenue stream for the city and removing it from management of the properties in favor of new private owners who could presumably be more efficient, as well as leverage new debt and equity to support a property.

Some parcels were reserved for public use, or disposition under the Koch-era Third Party Transfer program, but the inventory of city-owned properties shrank from the tens of thousands to the hundreds.

With the city’s revitalization, and with a period of low interest rates, the number of at risk apartment buildings went down. However, the Covid pandemic started driving up the number of one and two family homes, and smaller apartment buildings foreclosures, with particular impact on lower income communities of color. While the rate of tax lien foreclosure was small, on the order of 2% in a given year, anywhere from 10-20,000 properties could be affected. Opposition to the tax lien sales among advocacy organizations and elected officials brought the issue into focus.

The upshot was a moratorium on tax lien sales at the end of 2021.

That continued until resumption was approved by the City Council in June 2024, with a series of safeguards intended to mitigate the effect on small property owners. It also allowed for vacant land to be diverted for targeted disposition for development.

The decision, intended as a revenue boost to address the budget shortfall, was not without controversy. Opponents argued that tax lien sales led to speculation and displacement and were unfair to hard-pressed homeowners. A counterproposal which picked up political currency among progressive elected officials was the idea of creating community land trust and land banks to which foreclosed property could be transferred and then rehabilitated or developed with taxpayer support by local nonprofit organizations committed to neighborhood stabilization.

While the mechanics of the different proposals for this vary, they share similarities with the Koch program in their reliance on nonprofit management and public subsidies.

The cornerstone of the concept is that the delta between a financially functioning building and a defaulting one is the private owner’s profit and that by moving ownership to the public, shortfalls can be avoided. It assumes that self-determination by community organizations will compensate for private sector efficiencies and management experience.

Aside from the practicalities of such an approach, and the ability to learn from both the successes and failures of the Koch effort, is the question of whether city government should put its resources into preventing foreclosures or leveraging them.

The city has a series of programs to help buildings at risk, through low interest loans, property tax relief and subsidies such as federal tax credits and tax exempt bond financing, in exchange for tenant income limitations and lower rents. The use of these preservation tools is limited by the capacity of both owners and agencies to navigate the requirements and availability of funding.

Expanding these programs could be constrained by anticipated federal budget cuts in a potentially deteriorating financial environment. Should that be the case, the number of tax delinquent buildings can be expected to increase. At that point, the administration and the council will have a choice: continue to take tax lien revenue and let the private sector sort out what happens with the properties or take the properties into public ownership with responsibility for the consequences.

The outcome of the November election may determine whether the prevailing approach is transactional or aspirational.

Former NYC Council Member Ken Fisher is a member of the national law firm of Cozen O’Connor, whose practice focuses on city and state regulations, transactions and investigations. The views expressed are his own.