What Owners Can Learn From How Lenders Handle Property Taxes
Residential mortgage servicing largely solved the property tax problem decades ago by escrowing the payment. The servicer collects monthly, holds the funds, tracks the obligation, and pays the authority. Nobody has to remember anything.
Commercial real estate works differently. A substantial share of commercial loans are structured without escrow, leaving the borrower to pay taxes directly. For sophisticated sponsors with good systems, that arrangement makes sense and preserves cash flow flexibility. What it also does is remove the mechanism that would otherwise catch a missed payment, which means the first indication something went wrong is often a delinquency notice or a lien filing.
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The exposure compounds when liquidity gets tight. Bills arrive semiannually or annually, enforcement is not immediate, and a borrower in triage mode treats a deferred tax payment as an interest-free float while debt service and operating costs take priority. That dynamic turns routine tax cycles into sudden balance-sheet exposure for the lenders and servicers holding the paper.
What makes a tax delinquency different from other missed obligations is where it sits in the capital stack. Unpaid property taxes carry statutory first-lien priority ahead of the mortgage, and jurisdictions routinely apply penalty and interest rates of 12 to 18 percent or higher on delinquent balances. Commercial tax delinquency runs between 1 and 3 percent in major metropolitan markets, which adds up to more than $3 billion in unpaid taxes annually.
For an owner, the range of outcomes is wide and the bad end of it is genuinely bad. “For many owners the best case scenario is tens of thousands of dollars of fines,” said Aaron Eichenlaub, Senior Vice President of Commercial Payment Solutions at Cotality. “Worst case is a tax lien sale.”
Getting there usually takes more than one failure, and Eichenlaub describes the exposure as stacked rather than singular. “There are a few layers of risk,” he said. The first sits outside the organization entirely. “One is just missing an update. Things like jurisdiction rules, valuations, and deadlines can change, especially when you own properties across multiple taxing authorities.” A reassessment notice or a changed filing deadline arrives by mail, with no confirmation that anyone read it.
The second layer is internal. “The other risk is having someone on the team misinput the data or drop the ball on making the changes altogether,” Eichenlaub said. A notice that arrives correctly and gets entered wrong produces the same outcome as one nobody opened.
Neither layer gets caught by the monitoring most portfolios actually run. Annual sample audits, post-delinquency notifications, and manual checks across fragmented assessor portals are reactive by design. By the time a missed payment shows up in that process, penalties have been accruing and the problem is being managed rather than prevented.
Lenders have had to solve this because escrow administration made it their operational responsibility first. Servicing loans against properties scattered across dozens of states meant building the capability to track obligations in every jurisdiction those properties sat in, and that work produced a discipline that most owners never needed to develop.
“The lenders have operationalized understanding risk better,” Eichenlaub said. “They are much better at thinking about it not as a data point and more as a process since they know how taxes can change.” A tax figure captured at acquisition holds until something changes, which in practice is not long. Treating it as a standing obligation that requires monitoring produces different systems than treating it as a number in an underwriting model.
The most useful recent development has been direct connectivity to the authorities themselves. By partnering with tech companies that have created APIs with participating taxing authorities, real estate companies can remove the lag between when something changes and when anyone knows about it. “API connectivity from the taxing authorities helps provide the timely updates needed to stay ahead of changes,” Eichenlaub said. “We have seen a huge uptick in API adoption from property tax authorities in cities and counties across the country.” Adoption has been uneven across the roughly 22,000 taxing authorities operating in the United States. Cotality maintains connections across that full set and acts as a fiduciary on the payments it processes, which runs to roughly $30 billion annually.
Centralizing that monitoring also removes a category of work that occupies capable people without producing much. Confirming a payment cleared, chasing a receipt, reconciling a refund, and verifying that an assessment change made it into the system are all necessary and none require the judgment of an experienced accountant. “Validating payments, confirmations, and refunds can take a lot of time away from other important jobs,” Eichenlaub said. “By partnering with a firm that can do that for them they can really find some extra time for accountants and managers to work on other, higher value tasks.”
Non-escrow arrangements make sense for plenty of borrowers and will continue to. What they remove is the tracking mechanism that escrow provided by default, and the portfolios carrying that exposure are often monitoring it with annual audits and manual checks across jurisdictions that change their rules without warning. Lenders built better systems because the first-lien priority of a tax delinquency made it their problem. Owners facing the same priority can now use the same tools and the same strategy as lenders to help them keep their property tax risks to a minimum.
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