New York City’s next securitization of property tax liens features less exposure to vacant lots, which is generally considered to be a riskier asset than liens on commercial, residential or industrial property.
Just 5.1% of the 3,554 tax liens totaling $91 million that back the transaction, NYCTL 2018-A Trust, are vacant lots, according to rating agency presale reports. That’s lower than 9.2% for New York City’s previous deal, which was completed last year. “Vacant lots have historically experienced the highest foreclosure rates and loss on foreclosure sale,” Moody’s Investors Service noted in its presale report.
The bulk of the initial collateral, 63.98%, consists of residential property; commercial and industrial property together account for the remaining 30.96%.
All of the tax liens arose from unpaid real property taxes, assessments, sewer rents, sewer surcharges, water rents and other charges imposed by the city; in the case of water and sewer charges, the New York City Water Board.
As a result of the stronger credit characteristics, New York City was able to borrow more against the value of the collateral than it did in its prior deal. The single $75 million tranche of notes to be issued represents 82% of the initial tax lien principal; that’s up from 80% for the NYCTL 2017-A transaction.
Both Moody’s and Kroll expect to assign a triple-A to the NYCTL 2018-A notes, on par with 2017-A; J.P. Morgan Securities is the placement agent.
Both deals benefit from a “full turbo” feature: Any funds left over after making regular principal and interest payments on the notes are used to pay down additional principal. In other words, the sponsor does not receive any funds until the notes are fully repaid. As a result of this feature, all of New York City’s tax lien securitizations have repaid well ahead of their expected maturities. Currently, only the two prior transactions, NYCTL 2016-A and 2017-A, remain outstanding, according to Moody’s. Average annual liquidation rates have exceeded 30% in all but one year since 2006.
Another strength of the deal, according to Moody’s, is the low lien-to-value ratio of 9.9%. Moody’s considers this to be the primary credit metric in predicting losses to the bonds. Because of its senior priority position in the event of liquidation, any other encumbrances on the property, including mortgage debt, is not a factor in assessing the credit risk of the transaction,” the presale report states.
Moody’s believes that property values can decline by a considerable amount before the collateral takes a loss in the event of a tax lien foreclosure sale.
It noted in its presale report that the New York City real estate market has historically been one of the more resilient in the nation. Moody’s expects the city’s residential property prices to continue to grow at a faster pace than the nation. It also takes comfort from the fact that commercial properties situated in major markets exhibit more cash flow and capitalization rate stability over time compared to properties located in smaller or tertiary markets.
Similar to the New York City’s previous few deals, there will be two servicers, each of which can service the entire transaction if necessary; MTAG Services is expected to service approximately 53.4% of the initial collateral pool, while Tower Capital Management will service 46.6% of the initial collateral pool.
This is the second New York City tax lien securitization where the interest accrued on tax liens after the sale date is at a rate of 6% per year, rather than at a rate of 9% per annum for properties with an actual assessed value of $250,000 or less.
The servicers are permitted to commence foreclosure proceedings seven to 12 months after the sale of the liens to the securitization trust. The initial redemptive balance of the tax liens sold to the trust is inclusive of unpaid real estate taxes and accrued interest, unpaid water and sewer charges and accrued interest, other municipal charges and a 5% surcharge for lien advertising and notice expenses.