Tax Lien

A tax lien is an interest imposed by a governmental authority—local, state, or federal—against a property owner for unpaid taxes. Property tax liens are generally specific to the parcel and often take statutory priority over mortgages, while federal tax liens may be broader and attach to multiple assets. In commercial real estate lending, recorded tax liens are title exceptions that must be resolved or subordinated. Lenders assess tax lien status during due diligence because unpaid taxes can lead to tax sales, penalties, and potential extinguishment of junior security interests.

During loan underwriting and closing, obtain a current tax status report and ensure all property taxes and assessments are paid or escrowed. If a tax lien exists, structure the transaction to cure delinquent taxes prior to funding, negotiate a subordination agreement if permitted, or require a payoff in escrow. Lenders commonly require tax certificates or paid receipts, and may insist on tax escrow accounts for ongoing collections. For federal tax liens, additional steps such as lien withdrawals, IRS installment agreements, or bonding may be necessary to protect mortgage priority.

Tax liens are uniquely dangerous in CRE lending because many jurisdictions afford them statutory priority, meaning they can wipe out or reduce a lender’s security even if the mortgage predates the tax lien. A tax sale can remove title or subject the property to penalties and interest that erode value. For borrowers, unresolved tax liens limit refinancing, sale, or leasing options. For lenders, ensuring tax liens are cleared, escrowed, or otherwise addressed is foundational to preserving enforceability, predictable foreclosure outcomes, and accurate collateral valuation.