Tax-auction bargains shortchange city

Published 9:43pm Saturday, June 28, 2014

When a batch of Suffolk properties was auctioned at the downtown Hilton Garden Inn one day in late May, Joe Brooks was among the bargain hunters.

The owner of a pavement maintenance company cast the winning bid for 248 Pinner St. He plans to use it for parking so he can lease the second floor of his business premises, just around the corner.

“We can turn that into law offices,” Brooks said.

He got a good deal at the auction authorized by Suffolk Treasurer Ron Williams to recover unpaid real estate taxes. Three or four such auctions are held each year, and the properties usually go cheap.

In fact, records indicate that such sales often fail to garner the amount owed in back taxes and sometimes barely pay the auction and legal costs.

Under state law, properties are eligible to be auction by a municipality when taxes have gone unpaid for two years.

In Suffolk, several hundred properties might meet that qualification at any given time, but Williams generally starts the lengthy process of gaining court approval only “on the basis that the taxpayers are deceased or have moved away, and the heirs are not interested,” he said recently.

“In most cases, there is nobody to step up and pay the taxes.”

The city tries to set up payment plans for those who get in touch, Williams said.

Court records reveal the auctions are falling well short of recovering what the property owners owe the city. For all sales in which the court approved the disbursement of proceeds during the past 18 months, the city recouped less than 5 percent of the $726,000 it was owed on the properties.

The court approves each step of the process. As a special commissioner, Clarence Brooks has handled the legal work on behalf of the city for about 12 years, Williams said.

Brooks charges a rate approved by the court, and in the line for the proceeds, the attorney is ahead of the city. His cut from the sale of 45 properties during the 18 months was at least $109,000, according to the records.

Other cities do it differently. For instance, Portsmouth City Council has empowered Treasurer James L. “Jimmy” Williams to wait only one year, rather than two, before an auction can be authorized, and a staff attorney handles distressed properties. “That prevents me from having to pay an outside attorney,” Jimmy Williams said.

Virginia Beach Treasurer John Atkinson said his city waits three years. And because real estate is generally more valuable, he said, often someone owing $10,000 taxes on a parcel worth $50,000 — for example — will just borrow it from a bank.

“We don’t have a lot that have real old taxes,” he said.

Brooks did not respond directly to requests for comment, but Ron Williams’ office worked with him to provide a total of how much money the attorney had recovered for the city on delinquent tax accounts as of December 2012: almost $3.89 million. That includes collections made after the legal process was started but before the properties wound up at auction, Williams explained.

Every two years, the city can also claim surplus equity after lien holders are paid, and via that process Brooks recovered $725,385 during the same period, according to Williams.

While the main objective is to recover unpaid taxes, auctions also get unproductive properties back on the tax rolls and spur new development, Williams said.

After an auction, “a lot just sitting there growing weeds and collecting trash becomes a revenue-producing tool for the city,” he said.

Williams said he tries to create “a volume and velocity of cases” the marketplace can reasonably absorb. “We don’t want to create an imbalance between supply and demand,” he said.

In recent years, Williams’ task has been complicated by two Chesapeake developers, Eric Menden and George Hranowskyj, now serving prison time for a $41 million fraud scheme that contributed to the failure of the Bank of the Commonwealth.

In return for favors they rendered to its insiders, without the proper due diligence, the bank financed the pair’s buying spree, including 79 Suffolk properties in a 2008 deal, and then approved multiple cash advances against the real estate.

“The city has been a victim of that very complicated bank fraud,” Williams said, adding that he has tried to limit the fallout by expediting the auction process, seizing rents and even selling two parcels to the city as part of the new administration building under development on Market Street.

For all 79 properties, $456,000 was owed in March 2013, he said. “Prior to being held by that group … the taxes had been paid on those properties for well over 50 years.”

Besides unpaid taxes, Williams is attempting to recover other costs also variously charged to delinquent accounts — grass cutting, housing violation fines, legal fees, demolition charges.

To improve public safety and combat blight, city officials have been demolishing dozens of dilapidated buildings with taxpayer funds, and recovery efforts often make up a sizable portion of what “unpaid tax auctions” and other activities by Williams’ office seek to recover.

According to the court records, Joe Brooks — one of many buyers putting a delinquent property to productive use, for themselves and the city — paid $1,900 for 248 Pinner St., formerly owned Suffolk Property Development LLC, one of Menden and Hranowskyj’s outfits.

The parcel had unpaid taxes and other charges to the tune of $30,166. While city had the parcel assessed at $16,500, during the legal process leading up to the auction, it was independently appraised at $9,000.

For many other auctioned properties, the court records reveal an even greater discord between the city’s assessment for levying taxes and the independent appraisal, such as $23,600 against $2,500 for 152 Mahan St.

Responding to questions via email, city spokeswoman Diana Klink wrote that the appraisals evaluate a given parcel “from a distressed sale aspect and value it accordingly.

Because the recent recession has depressed values, “generally speaking, the appraised value of properties prior to our auctions have probably averaged about 50 percent of the assessed values,” and in turn the winning bids have averaged about 50 percent of the appraised values, Williams said, meaning the properties have sold at auction for about a quarter of their city-assessed value. The court records generally confirm this.

Williams said Suffolk’s approach is a model for other cities. Rather than selling them to the highest bidder on the courthouse steps, properties are marketed extensively, he said, even to the point of giving tours to prospective buyers.

“I’m proud of the work we do,” Williams said. “If we don’t pursue these accounts, we are sending the message that it’s OK to not pay real estate tax, and that undermines the integrity of the whole system.”


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