First National Holdings is planning its first securitization of property tax liens, according to a presale report published by Kroll Bond Rating Agency.
The initial collateral for the $87.5 million FNA Trust 2013-1 will be property tax lien certificates within Cook County, Illinois that have been purchased by three subsidiaries of FNH: FNA Elm, Rock Elm, and White Elm.
The owner trustee is Citibank.
The deal is comprised of two classes maturing in January 2019, a $78.5 million tranche with a preliminary ‘AAA’ rating from Kroll and a $9 million tranche with an ‘A’ rating.
When a property owner fails to pay taxes, the local authority creates a tax certificate on the property. In many states these certificates, which are senior in payment priority even to first mortgages, are sold to investors at auction. According to the National Tax Lien Association, an estimated $21 billion of real estate property taxes become delinquent annually and approximately $4 billion to $6 billion in unpaid property taxes are offered for sale to the private sector each year.
The rate of interest and penalties on tax certificates vary from state to state, but the statutory rate is typically set at a punitive rate to discourage continued delinquency, according to Kroll.
A tax certificate may be redeemed by the property owner or a third party within a statutory period, typically 2-3 years. At the end of this period, if the lien has not been paid, the tax certificate holder has the right to obtain title to the property foreclosure and either sell or maintain it in order t recover proceeds.
The securitization will provide considerable liquidity for FNH, as it represents the bulk of the company $120 million portfolio of tax liens.
The transaction features an acquisition account that will be used to purchase up to $12.5 million of subsequent liens on existing properties within the initial collateral pool. Typically, the purchaser of the tax certificate is entitled to a right of first refusal for the purchase of all subsequent tax liens.