May 5, 2015
by Jeff G. Underwood
Sirote & Permutt, P.C.
USFN Member (Alabama)
Benjamin Franklin once said, “An investment in knowledge pays the best interest.” When it comes to investing, nothing will pay off more than educating oneself. An investment opportunity in Alabama, in which local residents and out-of-state investors regularly participate, involves annual ad valorem property tax sales.
Alabama ad valorem taxes are paid in arrears. Taxes become due October 1 for the previous year and are delinquent if unpaid by December 31, subject to penalties and interest. The state is comprised of 67 counties, and each will conduct a tax sale for unpaid taxes, usually in late April or early May of the following year. The current vested owner is provided notice of the sale, and notice is given for three successive weeks in a newspaper of general circulation for the county where the property is situated. The sale occurs on the prescribed date within the legal hours of operation.
Normally, one of three scenarios occurs: (1) the property owner pays the taxes at sale or prior thereto; (2) there are no bidders at the tax sale, and the land subject to the delinquent ad valorem taxes is sold to the state of Alabama (State); or (3) the land subject to the delinquent ad valorem taxes is purchased by a third-party investor.
Redemption — The property owner, or his mortgagee of record, has three years from the date of the tax sale in which to redeem the taxes, or risk a tax deed being issued in the name of the purchaser at the tax sale.
Tax redemption where the land from a tax sale has been sold to the State is fairly routine. The property owner or mortgagee requests a redemption application from the county and pays the amount due to the county revenue commissioner’s office when submitting the completed application. The county will then issue a redemption certificate to the redeeming party.
Where the property is sold to a party other than the State, the process is as follows: A tax purchaser can “bid in” excess funds (overbid) and the county may compute the statutory interest (12 percent per annum) based upon the total amount (taxes plus overbid) and refund the overbid to the tax purchaser separately; or, the redeeming party may be forced to pay the amount, including taxes, accrued interest, penalties, and the overbid amount. The redeeming party would make a separate application to the county for a refund of the overbid post-tax sale redemption.
Procedures Changed — Prior to November 19, 2013, the tax redemption procedure where the property was sold to a party other than the State was similar to that where the property was sold to the State. Pursuant to Ex parte Foundation Bank (In re CMC Properties, LLC v. Emerald Falls, LLC), 146 So. 3d 1 (Ala. 2013), the Alabama Supreme Court ruled that the redeeming party must present verification to the county that the tax purchaser has been reimbursed for any hazard insurance premiums paid by the tax purchaser on a residential structure located on the property with interest at 12 percent per annum, as well as for the value of all preservation improvements made on the property with interest at 12 percent per annum.
Redemption Affidavit — The Alabama Department of Revenue crafted a redemption affidavit for use by the various counties. The affidavit must be executed, before a Notary Public, by both the property owner (or the mortgagee if the property has been foreclosed) and the tax purchaser. For the most part, counties will allow each signatory to execute a separate form, but at least one county requires both signatures to be affixed to one affidavit. In addition, counties will generally provide the original tax redemption application and affidavit forms simultaneously, so that signatures can be obtained. Some counties, however, apply a different standard and require the fully executed and notarized redemption affidavit to be submitted before the county will release the redemption application. Unfortunately, this can create unnecessary delays.
Prior to November 2013, there were very few investors that took advantage of Code § 40-10-122(b) and (c). The potential for abuse by certain investors in determining the value of the “preservation improvements” is a distinct possibility. Should the redeeming party disagree with the value of those improvements, Alabama law provides a mechanism for determining the value.
Valuation of Preservation Improvements — Alabama Code § 40-1-122(d) requires the redeeming party to make a written demand upon the tax purchaser for a statement of the value of all permanent or preservation improvements made since the tax sale. The tax purchaser has 10 days from receipt of that demand to provide his list of improvements. Within 10 days of receipt of that response, the proposed redemptioner shall either accept the value so stated by the purchaser, or appoint a referee to ascertain the value.
The redemptioner shall notify the tax purchaser of his disagreement and inform the tax purchaser of the appointed referee’s name. Within 10 days of the receipt of this notice, the tax purchaser shall also appoint a referee and provide the redemptioner with that person’s name. Within 10 days of their appointment, the two referees shall meet and confer on a just award. If the two referees cannot agree, they will jointly select an umpire. A majority vote shall be made within 10 days after the umpire’s selection; that award is final between the parties.
The costs and timelines associated with redeeming tax properties, where the property has been sold to a party other than the State, will be decidedly higher as a result of the Foundation Bank decision. Many more investors will take advantage of the preservation improvements valuation component of the law where properties have been foreclosed and tax purchasers are allowed to take possession of a vacated property.
These tax purchasers could perform so-called “improvements” at exaggerated costs and place renters/occupants in the property. This would cause delays in redeeming the property and in evicting the occupants. Further, the tax purchaser could elect to not cooperate in executing the redemption affidavit, thus holding up the redemption process even more. By doing so, the current owner or mortgagee would suffer the additional costs and expenses associated with the referee/umpire settlement process, as well as having statutory interest continue to accrue during the disputed period of time.
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