A system designed to help recoup property taxes from delinquent home and business owners is being used instead by hedge funds, private equity firms and other investors to turn profits, a new report from Cook County Treasurer Maria Pappas’ office asserts.
The weakness in Illinois laws that allow the practice is especially harming cities and villages that have majority Black and brown populations and are already struggling with declining property tax receipts, the study argues.
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Pappas’ research unit examined seven years of data on a little-known loophole known as “sale-in-error” and concluded the practice has siphoned “nearly $280 million away from schools, parks, libraries, fire departments and other government agencies … where it was intended.”
“I was shocked” at the findings, Pappas said. ”But here it was in front of me. I was following the law. The law’s wrong. … It’s time to stop the bleeding.”
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The state law Pappas cited governs property tax sales, where property owners who don’t pay their bills can see their taxes put up for auction. When sold, a lien is put against the home or business until the owner can pay the taxes back to the buyer, plus interest.
In theory, tax sales are beneficial: Governments get money they may not otherwise collect, owners get extra time to pay bills without losing their homes, and investors make a profit at a low risk, earning interest if they’re repaid or eventually taking over the property.
About 95% of the time, property owners do repay the original taxes owed, with interest, according to the study. But when they don’t, tax buyers can seek other ways to recoup their investment.
Some experienced tax buyers have been taking advantage of the statute by finding ways to back out of a tax purchase, forcing school districts and other recipients to return the money — often with fees, court costs and up to 54% interest included, the study found. The practice is perfectly legal because Illinois has one of the most “charitable” laws in the country to undo those sales, the report says. But as a result, those properties end up back on the delinquent rolls and the taxing bodies have to steer money away from their own operations and toward paybacks.
When such tax sales are reversed, the cost is spread out among everyone who pays property taxes in that area. Tax buyers do pay $100 for each property’s PIN they buy that goes into an insurance fund. But it’s usually depleted within a month or two, according to the report. The rest of the payback money must be covered by funds in the property tax piggy bank. That shortchanges other services a municipality budgeted for.
That “sale-in-error” statute exists to undo property tax sales that shouldn’t have taken place, such as when the owner paid their tax bill, when the land is held by the government, a church or nonprofit; or it was already part of a pending bankruptcy.
But Illinois has other rules that benefit tax buyers. Among them: The buyer can get out of the deal through a self-inflicted error, without penalty. Judges have found simple clerical mistakes — such as the buyer misstating the cost to redeem a property by 3 cents, or by misspelling a street address “Greemwood” instead of “Greenwood” — sufficient to undo sales, according to the report by Pappas’ office.
In 1951, tax buyers helped write that change to Illinois tax code, tilting the playing field toward them and away from the most distressed property owners, according to Andrew Kahrl, a University of Virginia professor and the author of a 2017 study, “Investing in Distress: Tax Delinquency and Predatory Tax Buying in Urban America.”
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A 1983 tweak to state law also made county mistakes grounds for a sale-in-error, and judges have overturned at least 5,200 tax sales for that reason, roughly half of all sales granted since 2015, according to the Pappas study. Those errors can result from discrepancies between what’s listed on the county assessor’s website and the actual property. For example, the study said, there were nearly 400 cases where tax buyers got their money back, plus costs and interest, because an exterior was described as wood frame when it was brick; in 35 cases, properties were erroneously listed as having zero square feet.
The treasurer’s office examined tax sale practices in several metropolitan areas around the country and found “tax buyers (there) must do their own due diligence and assume the risk.” None reported paying investors back for government website errors.
Illinois’ generous “sale-in-error” provision acts as a safety net for investors to get their money back — sometimes with interest — if their investment doesn’t work out, according to Kahrl. “Because property records are riddled with minor errors, it’s easy to find some small thing” that are grounds for a sale reversal, he told the Tribune. “It’s coming directly at the expense of Cook County taxpayers.”
The treasurer’s office assumes blame in the report too. While it researches properties before putting their taxes up for sale, it “still misses avoidable errors,” the report says. That includes selling taxes on properties already found to be in error and tax-exempt properties, such as a synagogue, land owned by the Catholic church, a post office and numerous Chicago-area highways. Some highway sections have been sold “over and over” by mistake because of poor coordination between county offices, the Pappas report cites.
In one case, the treasurer sold taxes for a portion of the Kennedy Expressway that the assessor’s office had wrongly classified as taxable vacant land. The purchaser, a New Jersey based investment fund called Madison C/O Stonefield IV bought $1.6 million in taxes for years 1996 through 2015, according to the report. The company held on to the “taxes for three years before seeking a refund, compiling interest along the way” and claimed in court filings it had “no knowledge” the property was actually a stretch of highway.
The company testified in court it hadn’t checked the assessor’s website or looked at the property before making the purchase and believed it was buying taxes on “111,000 vacant square feet in a coveted part of Chicago,” according to the report, and “only became aware” the property was a highway “sometime after paying all of its past due taxes.”
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A judge eventually issued a refund without interest after noting it was “almost implausible and inconceivable” the firm would spend so much without looking at the assessor’s website, the report says.
Some of the firms that have received the most refunds are local, according to the report. “Various shell companies … associated with” suburban tax buyer Greg Bingham were awarded $95.4 million in refunds on roughly 2,300 properties, including $7.8 million in interest, according to the report.
Bingham told the Tribune that getting a refund and making a profit aren’t one and the same, and that a vast majority of sale-in-error refunds don’t include added interest. His “primary goal” is “to build a base of property ownership and management,” by flipping and selling properties.
“Other tax buyers are more interested in the arbitrage,” he said. “We’re not a paper-driving entity, we’re bricks and mortar.”
But he estimated he’d bought about 16,000 certificates in tax sales over the past seven years and in the vast majority — 95% of cases — the property owner pays what they owe and the lien is dropped. He redevelops “maybe 75 to 200″ properties a year.
The report also details a case in which a firm associated with Bingham also sought to undo a tax sale on a strip mall in Calumet City. He sought the sale-in-error because the property was listed on Dolton Avenue instead of Dolton Road, according to the report.
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Bingham denied that he has purposely bought taxes where he knew the county made a mistake, in order to reverse the sale.
A judge did not grant that sale-in-error. A separate sale-in-error case alleging the strip mall contained hazardous materials that were not previously disclosed was also denied, but is under appeal, according to the report.
Chicago firm Wheeler Financial got $28.3 million in refunds, including $3.7 million in interest, the Pappas study states.
First National Assets, whose majority owner is based in Denver, received $23.7 million in refunds; New Jersey-based Stonefield received $17.9 million, and Florida-based investment firm Alterna Tax Asset Group received $8.3 million, according to the report. Together, the three received $6 million in interest.
Those refunds don’t represent profit for the tax buyer, said Hal Dardick, Pappas’ director of research who edited the study, which was written by Todd Lighty. Both are former Tribune reporters. “We found nothing they’ve done illegally for sure. But there’s no reason we shouldn’t be aligned with other states in terms of when the tax buyer is entitled to get their money back when they’re entitled to earn interest,” Dardick said.
Chicago leads in the overall number of sales in error during the analysis period: 5,233 sales in error, with a total refund of $85 million, according to the report. But because the city has such a large tax base, the refund works out to $31.11 per capita. For a small village like Dixmoor, however, 32 sales in error meant a refund of $3.4 million to tax buyers, representing $1,142 per person. In Harvey, which saw 599 sales in error totaling $14.7 million, the cost is $724 per person, according to the study.
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The study also hangs some blame on the sheriff and clerk of the Circuit Court, who did not notify property owners in a timely manner they were in danger of losing their properties, and on county judges who have “liberally interpreted” the law to grant paybacks without “weighing whether any actual financial harm was done to the tax buyer.” Pappas credited many county officeholders for being willing to acknowledge issues or tweak their practices.
The report makes a long list of recommendations, most of which would necessitate action from Springfield: Requiring tax buyers to prove an error led to financial harm, ban sales in error based on insignificant clerical mistakes by the county or tax buyers’ own mistakes and make several changes related to bankruptcy filings before and after the tax sale.
Kahrl said the state should take a deeper look at the whole tax sale system. He said 20 states don’t sell delinquent taxes to private bidders and that tax buyers like to portray themselves allies to local governments. “This report shows, no, they’re not. They’ll profit at the expense of local governments as eagerly as they profit off distressed homeowners,” he said.