Ruling a blow to small investors

County tax auctions favor large financial institutions

Sometimes trying to be fair isn’t legal, said a judge ruling against Florida counties’ efforts to help small-time investors compete against large financial institutions.

In online county auctions held on or just before June 1 each year, winning investors pay off money owed by property owners who didn’t pay their tax bills. Investors receive certificates for the money, which is to be paid back with interest by the property owner. The auction proceeds go to the local governments that charged the taxes so they can pay their bills for police, parks and other services.

Miami-Dade expects to auction off about $150 million in unpaid taxes this year. Broward and Palm Beach counties currently expect to auction off about $88 million each.

After the Great Recession, large banks and hedge-fund operations flooded the auction competition, attracted by the minimum 5 percent interest return the tax certificates carry. In response, 20 Florida counties — Broward and Palm Beach were among them, Miami-Dade was not — stopped firms from being able to group together thousands of bids for a certificate and have each treated individually, a practice that had increased their chances of winning auctions that were usually decided by a random lottery.

But Leon County Circuit Court Judge Terry P. Lewis ruled this year that state law requires each of those corporate bids to be treated individually, as if each were a separate person.

The counties “are understandably trying to address what seems to be an unfair advantage” for the large firms, wrote Lewis, based in Tallahassee. “It may be ‘fair’ under the circumstances to do so, but it is not legal.”

Personal investor Todd Kliston, of Plantation, who has taken part in the Broward auctions for more than 30 years, said the practice in place in the county since 2014 had made a difference in his ability to obtain more tax certificates.

“It was much more competitive,” Kliston said. “For the past three years, I’ve been relatively pleased with the results. This year, I don’t know what’s going to happen.”

A 2013 Sun Sentinel investigation exposed how financial heavyweights found a way to turn the system into a profit center. The auctions, once held in courthouses and commission chambers, had moved online, opening them to bidders from around the country and world. Participants electronically bid down the percentage rate they’re

willing to accept to buy a property’s tax debt. If there’s a tie, and there usually is, the winner is chosen by a random lottery.

Some players began using automated computer programs to obtain corporate taxpayer ID numbers from the IRS by the hundreds of thousands, with the ID numbers assigned to shell companies. Using those IDs, they were able to register tens of thousands of companies as “sub-accounts” in the online auctions.

The parent company could then bid on behalf of all its related companies with a single keystroke. If it came down to a lottery, they stood a much greater chance of winning because they had far more chances than their competitors.

After the Sun Sentinel report, Broward County changed the way it handled the auctions, going to a practice similar to one in place in Palm Beach County that prohibited the use of related sub-accounts. That’s what the judge struck down.

Former Broward Commissioner Lois Wexler had pushed for the change, already upset by the role large financial institutions had played in the economic downturn and the havoc wreaked on local communities.

“Big banks, big investment firms were gobbling it all up,” Wexler said of the tax certificates. “My goal was to assist the little guy.”

Miami-Dade County never prohibited the sub-accounts, because officials there determined the action wouldn’t hold up in court, County Tax Collector Marcus Saiz de la Mora said. Helping investors was never the first concern anyway, he said.

The most important goal is to make sure the certificates are sold so the money gets into the hands of local governments to pay their bills, Saiz de la Mora said. The second goal is ensuring property owners get the lowest interest rate possible on the taxes they still must pay.

One change Miami-Dade implemented in 2012 was to require its $5,000 minimum deposit be paid for each sub account, not just the parent company. That’s something Broward County later picked up with its $2,000 minimum deposit; Palm Beach County is doing the same this year with a new $5,000 minimum deposit. In all three counties, each account must meet the assigned minimum or 10 percent of the value of the tax certificates the account receives, whichever is greater.

“It could be tens of millions of dollars depending on the size of the group,” which would have to be deposited during the auction, Saiz de la Mora said.

Wexler doesn’t know how much of a setback the deposits will be for large investors.

“That’s nothing for these big banks, it’s nothing for these big companies to do that,” Wexler said.

Magnolia Florida Tax Certificates LLC, which filed the suit, objected to the deposit provisions, but the judge said they were valid and not exorbitant. He also ruled Broward and other counties could require affidavits for each account. Broward’s affidavit, for instance, attests that each taxpayer ID number is for a real company and was not created solely for the tax certificate auction.

Palm Beach County took its affidavit a step further and may have come up with a new way to level the playing field. The county has implemented rules that allow bids to be submitted in large groups, as the judge required, but it prohibits any coordination among the individual bidders in those groups. Bidders could put at risk thousands — if not millions — of dollars submitted as auction deposits if they violate the rules.

Magnolia went back to court to challenge Palm Beach County’s rules because they keep “bidding groups and couples from acting in concert to win as many certificates” as possible, but on Thursday the judge denied Magnolia’s motion, attorneys said.