Magnolia Florida LLC, a Lake Mary, Fla.-based real estate and land company, recently raised and invested $10 million from 29 private investors in what is a business growing big fast as a growing slew of people fail to pay up on their annual property tax bills come each April 1.
Within the past couple of weeks, Florida county tax departments auctioned off senior lien certificates for an estimated $2.5 billion in unpaid 2009 property taxes that were due two months ago. Each county issues and auctions tax certificates to large and small investors, who cover the amount of tax owed. Normally, within 24 to 30 months, property owners pay up on their tax obligations at the risk of losing their property, and the investor gets the money back, with interest.
While opportunities for realistically priced land-asset investments have been few and far between since real estate-owned land has been tied up in the United States' banking system's inertial toxic-asset backlog, investment plays such as tax certificates represent a short-term, relatively safe way to get double-digit returns on investment.
And that's only recently, as property tax delinquencies have suddenly shot up and as institutional investment funding for the certificates has showed signs of diminishing in recent months.
Large players have dominated the Florida tax certificate game for years--JP Morgan's Xspand unit, Wachovia, and BankAtlantic--and have used their heft and statewide scope of resources to win the certificates with low-ball bids at a high-volume level. Traditionally, they've competed with local real estate mavens who covet specific properties' certificates with an eye toward taking over control of particular parcels of land.
"We've got the technology and the resources to work at a statewide level, but we've got real estate knowledge about land that the big institutional players don't have," said Chris Ward, managing principal at Magnolia Florida. "We're aiming to be the No. 2 player in tax certificates, second to JP Morgan, within the next couple of years."
In real estate-beleaguered Florida, the one thing that's almost as sure a thing as death and taxes is people who don't pay their property taxes. Whether it's a homeowner who is falling behind on his household bills, or a developer or builder that has scores of unbuilt lots, property taxes are due.
Investors compete with one another in a Dutch-style auction. Counties issue a certificate for the amount of tax owed, and sell the certificate to the investor who bids the lowest interest rate.
As unpaid taxes have soared, and simultaneously, liquidity seeking investment in the certificates has shrunk, the winning interest rates have gone up this year and are expected to get even healthier as tax delinquencies grow.
Magnolia Florida's winning bid on its $10 million for 6,000 certificates is 16%, which means investors get their money back, plus the interest payment. The largest of the certificates purchased was worth $600,000 and the smallest, $500. The company trolled all the counties certificates data with a tech system designed to plug each tract into a GIS (Geographic Information System). Knowing each parcel's geographic information gives the Magnolia team insight into whether the land's value actually matches up to the face value on the property tax, which works to ensure that the investment is smart.