Q: My banker sharply raised the interest rate on my business loan the other day. I was shocked. I’ve always made my business loan payments on time, but when I asked my banker, he said that the bank was aware I was behind on property taxes for my business. I admit that I’ve fallen behind, but I plan to catch up. Frankly, I don’t see a connection between property tax payments and my business loan.
A: Your lender is nervous because your missed property tax payments are a sign that your business—and their loan—may be headed for the rocks. If they have a mortgage on your business property, the property taxes create a lien that is superior to theirs.
Let’s back up a bit. Indiana property taxes have been challenging the last few years. Counties went through a reassessment and then fell behind in billing commercial and residential property owners. You probably remember receiving only a single bill some years and then paying three in one year to catch up. This was the case in many, if not most, Indiana counties as they completed their required reassessment process. Most counties are now back on the regular May and November cycle for property tax payments.
However, property tax billing and collection were at their most confusing during the recession, when businesses were experiencing lost revenue, poor projections and, in general, toughing it out as best they could.
Many businesses simply fell behind in their property tax payments, despite their best intentions. It was easy for a business owner to skip these payments, since no one was calling or coming to visit to get the payment. There were no collection calls to speak of. When lenders noticed the property tax payments were not made, the loan was deemed to be in default, and in some cases the rates were increased, or the loans were called.
Businesses that miss three straight property tax payments can end up on the property tax sale list in their county. Any registered bidder can claim the property for the amount of the tax liability, which is often far less than the value of the business. Business owners may retain their property only by matching the amount paid at the tax sale—plus a penalty—within one year. Of course, businesses in that situation may not have the cash to redeem their property since they couldn’t make the tax payments in the first place.
This is why lenders are nervous when their borrowers fall behind. They fear that their borrower will lose the property, default on their loan, and go out of business.
Borrowers are climbing a very slippery slope: The more they get behind, the more likely they are not to be able to catch up.
You should talk with your banker and your county treasurer immediately to try to work out a partial tax payment plan. The treasurer may be helpful. Counties obviously need money to pay their bills to vendors, salaries to emergency workers and other employees, and upkeep and expansion costs on public facilities. But counties also have an interest in helping businesses stay open. A tax sale is not a moneymaker for the county because it is a red flag that another company is ceasing to exist.
Partial payments are not cheap: They will include penalties. Be sure to pay enough to keep your property out of the tax sale. Communication is key.
Communicate with the treasurer, the lender and follow up that communication with consistent payments (even if they are small amounts) to show your intent to pay the obligations. Good luck!•
Wojtowicz is president of Cambridge Capital Management Corp.