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Defragmenting the Tax Receivables Market

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With Thomas R. McOsker

REBusinessOnline recently interviewed Thomas R. McOsker, who runs the Tax Receivables Brokerage division of GFI Group, a wholesale brokerage firm. Pools of tax liens trade on GFI’s DART (Distressed Asset Receivables Trading) platform. Wall Street has begun trading pools of tax liens to modernize the old courthouse auction, saving time and money — and providing some investors the possibility of acquiring properties at a fraction of their value.

REBO: What are Tax Liens or Tax Receivables?

McOsker: A tax lien is a public claim against the tax revenue owed by a tax paying entity on a particular property. These receivables are backed by the underlying property as collateral. In their various forms, tax liens are some of the oldest forms of municipal debt in existence, with history dating back 150 years in some United States jurisdictions, and even further back in Europe. The average size of a lien of this kind in the U.S. is estimated to be around $2,500.

REBO: Why are tax liens important?

McOsker: Local municipalities and county infrastructures rely heavily upon the collection of ad valorem real estate taxes, which are linked to the value of parcels within their geographical boundaries. Seventy-five percent of most city and county operating budgets are attributable to real estate tax collections. When property owners do not pay these obligations, the only alternatives are to cut services, raise taxes, or borrow from the government. By selling delinquent tax debt to the public, cities and counties can better ensure that they will pay their bills in a timely fashion, and satisfy their fiduciary responsibilities to their citizens.

REBO: Where and how are they sold?

McOsker: Currently some form of tax receivable, including tax liens, is sold in 29 states and the District of Columbia. As for the mechanics of the sale, most liens are sold in a public auction format which varies by location. Some municipalities continue to run traditional, open outcry auctions, while others have moved online. Wall Street brokerage firms and banks have begun to facilitate bulk sales of liens in the form of pools from municipalities to investors. This saves cities and counties the time and money it costs to auction off liens one by one. Once these lien pools are created, they can be sold on the secondary market through a licensed broker, changing hands not unlike to stocks and bonds.

REBO: What advantages to the buyers of these liens get?

McOsker: From a fundamentals standpoint, a tax lien is a form of well-collateralized debt, with the loan-to-value ratio of an individual lien averages 4 percent. Liens also bear a favorable interest rate. Depending upon the state, lien holders can charge up to 18 percent interest per annum. Additionally, lien holders in some states have the ability to foreclose on a property if a lien remains delinquent, enabling them to potentially purchase property for a fraction of its market value. With the secondary market beginning to attract activity from large banks and asset managers, investors also have a better liquidity option than they have ever had previously.

REBO: How can municipalities improve the sales process?

McOsker: Like any capital market, the mechanics of selling debt have evolved over the years. With the number of electronic transactions increasing dramatically by the day, it only makes sense that the market for tax liens continues to find its way online. As investors continue to clamor for better yields with less risk — and in larger size — it is in a municipality’s best interest to pool liens with the assistance of a third party, enabling a faster recovering for their coffers, especially in this economy.

— Interview by Randall Shearin

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