Tax Liens on Common Areas
With more and more developers going bankrupt and pulling out of partially constructed residential projects, we are seeing more and more instances of common area tracts, or tracts that are intended to become common areas in the future, being encumbered by tax liens where the developer owner has failed to pay property taxes on such tracts.
Although the Colorado Common Interest Ownership Act exempts associations from paying common area property taxes, such exemption does not kick in until the tract is transferred to the association and formally becomes a common area. Prior to the time of transfer, the pertinent tract is simply real property owned by the declarant of the community upon which property taxes are levied and must be paid.
In situations where declarant’s fail to pay property taxes on these future common area tracts, tax liens are created and may be purchased by third party investors through the County’s assessor’s office. After a tax lien purchaser holds the tax lien for three years, such purchaser may apply for a “treasurer’s deed”. Once the treasurer’s deed is issued, ownership of the particular tract will be vested in the individual.
So what’s an association to do if it discovers a third party purchased a tax lien or obtained a treasurer’s deed on one of its future common area tracts? We address options for associations below:
Tax Lien Purchased
- If the tax lien has been purchased but no treasurer’s deed has been applied for, the association will have the option of paying off the tax lien amount and extinguishing the tax lien. Although this may seem like a no-brainer decision, keep in mind that extinguishing the tax lien does not solve the ultimate problem of tract ownership not having been transferred to the association. Until this is done, property taxes will continue to accrue and if not paid, may result in more tax liens. Therefore, it is also important in these circumstances to take steps to facilitate the transfer of the land to the association.
- If the association does not want to pay off the tax lien, it can try contacting the developer/tract owner and demanding the tax lien be paid off by the developer and the land be transferred to the association as a common area. The success of this tactic really depends on the status of the developing entity and could prove to be a successful route if the developer still exists and owns the tracts.
- Sometimes associations choose to ignore tax liens and “roll the dice” to see if anybody applies for a treasurer’s deed. Oftentimes, these future common area tracts are nothing more than native grasslands, streets, or greenbelt areas that are not capable of being further developed or otherwise making money for investors. Therefore, some boards take a chance and assume no investor will want to actually apply for the treasurer’s deed for these types of properties.
- If the developer is nowhere to be found and it is a futile effort to demand transfer of ownership and payment of tax lien amounts from such developer, associations have one other avenue available: to contact the tax lien purchaser and try to buy the tax lien from the purchaser. If the association successfully accomplishes this task, it can stand in the shoes of the investor purchaser and apply for the treasurer’s deed after the three years. This will then allow the association to obtain actual ownership of the pertinent tract and request the treasurer treat the land as common area for which property taxes will not be collected from the association.
Treasurer’s Deed Issued
Once the tax lien holder obtains the treasurer’s deed to the property, it is too late for the Association pay off the tax liens and the property in question is owned by the third party.
In these types of cases, the investor owner typically contacts the association and offers to sell the land for an amount higher than what such investor paid for it (i.e. higher than the tax lien amount). If the association wants ownership and control over the tract, it may have to negotiate a sales price for the land and be out of pocket the sales price.
On the other hand, if the association does not want the land as part of its community, it can simply refuse the sales offer. However in that case, a third party will own the pertinent land and the association will have no control over how the land gets maintained and what is constructed on it (if anything).
In conclusion, it’s hard for associations to come out on top when developers fail to pay property taxes on future common area tracts. Therefore, it’s important for associations to regularly check on the status of property taxes until such time as common area tracts are transferred and even for a short time thereafter.
For more information on tax liens and association options for addressing this dilemma, please contact a HindmanSanchez attorney at 303.432.9999.