Jersey City officials began selling $15 million of individual tax liens on Thursday in an auction that featured strong demand from institutional investors.
The auction will continue through Wednesday, said Michael R. Cook, chief of staff to Mayor Brett Schundler. "What was in the past a sleepy, inefficient market has been transformed into a highly competitive, much more efficient market," Cook said. "Some investors came prepared to bid on everything."
The city has sold its individual liens on delinquent property taxes for years. Then in June 1993, the city completed a sale of $44 million in securitized liens. The following year, it sold $14 million of securitized liens.
The success of this week's auction of individual liens, however, may rule out the need to sell the securitized liens in the future, city officials said.
The lien sales are important because Schundler and the city council are locked in a battle over how to balance the city's 1995 budget.
The city's fiscal year began on July 1, but the mayor and council have yet to agree on a way to eliminate a budget gap of about $9 million on the city's $271 million budget.
Despite the city's fiscal stress, officials say the auction went well.
Investors are paid a maximum of 18% a year in interest on the lien. Investors are actually lending money to property owners who have not paid their property taxes.
The way the sale works is that investors often bid down the liens' interest payments. Demonstrating the strong investor interest in the liens, Cook cited the sale of a $540,000 lien on an apartment building. Starting at the state-mandated interest rate of 18%, the lien was quickly bid down to zero, Cook said.
The liens are secured by property, which means that lien holders can seize the property if the owners fail to make their payments.
Donald Williams, a principal with the Breen Capital Group, which manages Jersey City's securitized tax lien portfolio, said the auction is competitive and "actively bid."
"Brett Schundler's idea from two years ago has come to pass even more quickly and forcefully than we ever anticipated," Williams said.
Now that the market for tax liens is developed, institutional investors compete aggressively for the liens before they are sold in bulk, said Joel Cooper, senior vice president at WR Lazard & Co., Jersey City's financial adviser.
Since Jersey City's first securitization, New York City has sold $208 million of bonds backed by the city's delinquent real estate tax receivables. Waterbury, Conn., has negotiated a delinquent tax deal using more than $6 million of that city's unpaid back taxes.
In addition, Hanover, Mass., Treasurer Robert Haley is pushing for a state law that would permit tax lien securitization in Massachusetts. Haley has prepared a report that uses Jersey City securitized sales as a case study.
With the success of its bulk sales, Jersey City's next step may be to seek legislation that would give cities around the state the option of skipping their required annual delinquent tax auctions and going directly to securitized bulk sales, Cook said.