Tax Lien Fund FAQs
April 6, 2008
FAQ’s
What is a tax lien certificate? A tax lien certificate is issued by a county government when a tax payer is delinquent in paying his/her yearly property tax. The county records a first priority tax lien on title and sells the lien to an investor. Major Banks, insurance companies and Wall Street financial institutions have been investing billions in tax liens for over 100 years.
What is a first priority lien? A tax lien has priority over all other liens secured by the property including the first mortgage. Some exceptions apply to federal and state income tax liens.
How long is the Fund’s capital invested in liens? Most of the 25 lien states allow the property owner, their heirs, the lenders and the mechanic lien holders a redemption period of 6 months to 4 years to redeem (repay) the lien (back taxes) and the interest and/or penalty. During this time, the county assesses a high interest rate and or penalty and county fees. Historically most liens are redeemed (repaid) within one year, but may take up to four years. If the lien is not redeemed, foreclosure proceedings may take anywhere from 3 months to two years to finalize.
How long will I be invested in this managed lien fund? The fund will begin liquidating assets in the 5th year. Most of the remaining liens will be redeemed and all of the properties acquired through foreclosure will be sold.
Where is the risk? Risk occurs from purchasing bad liens on poor properties. Every lien has the potential to not be redeemed. That is where Lien Baron’s experience and expertise helps minimize risk for the investor. Fund management must decide 1) which liens to purchase and 2) which unredeemed liens to foreclose on. Due diligence and use of industry specific custom software help mitigate the risk of purchasing bad liens on poor properties. The fund will retain outside legal assistance in the processing of liens and foreclosure to ensure minimal risk to investments.
What kind of return can I expect? Each state and county sets a rate of interest that must be paid by the party who wants to redeem (repay) the lien. Interest rates range from 8% to 50% per year depending on the state/county. When the Fund is able to foreclose on a property, returns can be from 100% to over 1,000% with the sale of the property. See the “Sample Property” page for an example of a portfolio of properties purchased at one tax sale by the fund manager. The Funds target return is 25% to 30% per year.
How often will I receive a check from the Fund? Annually. The fund will pay out net redemption proceeds received and accrued interest earned every year. Investors will receive a financial report that includes a list of all liens purchased and redeemed each quarter, listed by county.
How is the fund structured? The fund is structured as a Delaware LLC. Investors will purchase an interest, or membership in the LLC. The managing member is Lien Baron, LLC. As an LLC, investors are not expected to assume any additional risk of loss or liability beyond their original capital investment.
What is the minimum amount that I must invest in the Fund? The Fund will offer units at $25,000 per unit, with a one unit minimum. The maximum invested capital will be capped at $5,000,000.
Who can invest? The fund will be open only to accredited investors who meet the eligibility requirements set forth by the SEC, and a certain number of non-accredited investors.
How does the Management get paid? Management charges a 2.5% fee for assets under management. This pays for overhead expenses and salaries. Management also receives 20% of the profits of the fund, so the manager only makes money when the fund makes money. Investors will receive 80% of the profits of the fund.
What kind of income taxes will I have to pay? The fund will generate interest and penalty income, both received and accrued from liens along with short-term and long-term capital gains from acquired property sales. The fund will issue a Schedule K-1 at the end of each calendar year reflecting each investor’s allocable share of taxable income. Investors may be able to invest in the fund through a tax free or tax deferred IRA. Please contact your tax advisor for advice on how investing in the Fund will affect your personal tax situation.
How experienced is the management team? Stephen Jonas has purchased hundreds of thousands of dollars worth of tax liens. Mr. Jonas brings years of real estate and investment banking experience to the Fund. Previously, Mr. Jonas was senior investment analyst for a private commercial real estate investment bank and provided financial and investment analysis on over $1 Billion in commercial real estate deals. Prior to working for the investment bank, Mr. Jonas was founder and president of a private residential real estate company which purchased and renovated single and multi-family houses. Over the last 5 years, Mr. Jonas has been directly involved in over $50 Million in commercial and residential real estate transactions.
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