Imagine that you extend credit to a company and secure the loan with a deed of trust on its real property. The borrower may still be making its regular loan payments. However, it may already be showing signs of financial distress and has failed to pay property taxes. Those delinquent taxes are then sold, and a third party acquires a tax sale certificate.
Suddenly, you face a problem: You do not hold the tax sale certificate, and the tax lien may take priority over your deed of trust. What do you do to protect your collateral? Although a tax sale certificate does not immediately transfer ownership of the property, it begins a legal process that can affect a lender’s rights, increase the cost of preserving the collateral, and ultimately threaten the lender’s lien position if the delinquency is not addressed.
What Is a Tax Sale Certificate?
When Nebraska real estate taxes become delinquent and remain unpaid, the county may eventually sell the tax lien through a tax sale.1 The purchaser at the tax sale receives a tax sale certificate rather than ownership of the property.2 Under the statute, the certificate evidences a perpetual lien on the real property for the taxes paid, and the holder may add any subsequently paid taxes to that lien.3 If the property is not redeemed, the certificate may serve as the basis for further proceedings through which the holder may ultimately obtain title or enforce the lien, depending on the applicable statutory process.
Because the certificate is a lien rather than a conveyance, the property owner retains ownership and redemption rights, and mortgagees and other interested parties may also redeem the property before any change in ownership occurs. For lenders, a tax sale certificate should therefore be viewed not as the immediate loss of collateral, but as the beginning of a process that requires monitoring and, in many cases, timely action.
Tax Sale Certificates Do Not Immediately Transfer Title
Although the prior section explains that a certificate is a lien rather than a conveyance, it is worth emphasizing the practical timeline. A lender typically has at least three years from the date a certificate is issued before the holder can even begin the process that leads to title4 transfer, and considerably longer where judicial foreclosure applies, since that path adds the time needed for service, a foreclosure decree, a sheriff’s sale and confirmation.5
The existence of this waiting period is important for lenders. Unlike an execution sale or a foreclosure judgment that may have immediate consequences, tax sale certificates often give interested parties an opportunity to evaluate the situation and determine an appropriate response.
That said, lenders should not treat this waiting period as a reason for inaction. The following sections explain why prompt attention matters and what options are available.
Nebraska Provides More Than One Enforcement Path
Nebraska law provides multiple mechanisms by which a certificate holder may enforce a tax sale certificate, and the applicable path can significantly affect a lender’s risk assessment.
Depending upon the circumstances, a certificate holder may pursue an administrative tax deed process or may proceed through judicial foreclosure.6 Nebraska law generally requires the certificate holder to proceed by judicial foreclosure rather than the administrative tax deed process once 110% of the assessed value of the property, less the amount needed to redeem, exceeds $25,000.7 This distinction can be significant because the applicable process may affect the timeline, notice requirements, costs and overall risk profile associated with the certificate.
Because the applicable enforcement path depends on the specific property and statutory requirements, lenders should investigate the particular certificate early rather than assuming a uniform timeline or process.
Why Tax Sale Certificates Matter to Lenders
Many lenders first discover tax certificate issues during collateral reviews, renewals, workouts, title updates or discussions regarding distressed credits.
A tax sale certificate issue can become substantially more expensive over time. Delinquent Nebraska real estate taxes accrue interest at 14% per annum from the applicable delinquency date, and the same 14% annual rate applies to the tax sale certificate redemption amount and to qualifying subsequent taxes paid by the certificate holder.8 As a result, delays in addressing a tax delinquency may significantly increase the amount necessary to redeem the property.
One reason tax certificates are important is that tax problems do not necessarily correlate with loan payment performance. A borrower may be current on loan payments while simultaneously allowing property taxes to go unpaid. In other situations, tax delinquency may be one of the earliest indicators of financial distress.
From a lender’s perspective, unpaid property taxes can signal several potential concerns:
- Cash flow issues;
- Declining property performance;
- Operational problems;
- Deterioration in collateral value; or
- Broader financial distress affecting the borrower.
Because of these concerns, lenders should treat property tax monitoring as an important component of overall collateral management. Regular review of tax payment status can identify emerging issues well before they become more significant problems.
Lender Options and Protective Measures
When tax issues arise, lenders should review both the applicable tax procedures and the governing loan documents.
Many loan documents contain provisions addressing:
- Payment of taxes;
- Events of default;
- Lender protective advances;
- Reimbursement rights;
- Interest on advances;
- Acceleration remedies; and
- Guarantor obligations.
These provisions can provide important tools for lenders seeking to protect collateral from tax-related risks.
Nebraska law generally treats advances for real property taxes as future advances necessary to protect the lender’s security, secured by the mortgage and generally retaining the mortgage’s priority against later-acquired interests, with reimbursement and potential subrogation rights recognized when a lender pays taxes or redeems a certificate to protect its collateral.9
The appropriate response will vary. In some circumstances, advancing funds to redeem the certificate may be the most effective course of action; in others, a lender may choose to work with the borrower to resolve the issue. Regardless of the approach, lenders who understand their loan documents and act early generally have more flexibility than those who discover a certificate issue only after it has significantly matured.
Conclusion
Tax sale certificates rarely become a crisis overnight. More often, they develop gradually while lenders focus on payment performance, collateral values and other aspects of the lending relationship.
By understanding how Nebraska’s tax sale certificate system operates, monitoring tax obligations and responding promptly when issues arise, lenders can better protect collateral and preserve available options before a tax problem evolves into a much larger credit issue.
- Neb. Rev. Stat. § 77-1801.
- Neb. Rev. Stat. § 77-1818.
- Neb. Rev. Stat. § 77-1818; 1980 Neb. Op. Att’y Gen. No. 361.
- Neb. Rev. Stat. § 77-1818.
- Neb. Rev. Stat. § 77-1902 (three-year period and foreclosure filing window); Neb. Rev. Stat. § 77-1837(3) (administrative tax deed vs. judicial foreclosure threshold); Neb. Rev. Stat. §§ 77-1902, 77-1903, and 77-1914 (service, decree, sheriff’s sale, and confirmation).
- Neb. Rev. Stat. §§ 77-1837 to 77-1863 (administrative tax deed); Neb. Rev. Stat. §§ 77-1901 to 77-1941 (judicial foreclosure).
- Neb. Rev. Stat. § 77-1837(3).
- Neb. Rev. Stat. §§ 45-104.01, 77-207, and 77-1824.
- Neb. Rev. Stat. § 76-238.01; see also Criswell v. McKnight, 120 Neb. 317, 232 N.W. 586 (1930).
