Homeowners on Presidio Terrace in San Francisco lost control of their street over a $994 tax bill. Image by Google Maps used with permission.

An small, unpaid property tax bill caused residents in a wealthy San Francisco neighborhood to lose control of the street they live on. About 10 years ago, that happened on an alley in Georgetown.

Neighbors on Presidio Terrace, a gated community, recently discovered that their street and common areas had been purchased by Tina Lam and Michael Cheng through a tax auction. The homeowners’ association, which previously owned the land, hadn't paid the tiny $14 a year property tax for many years.

According to the association's attorney, the tax bills were not paid because they were sent to an accountant who had not worked for the association since the 1980s. Ultimately they owed $994 in unpaid taxes, interest and penalties. Lam and Cheng paid $90,100 to win the tax lien at the auction.

Rich people getting their comeuppance is certainly a crowd-pleasing spectacle. But this practice is really common in cities, and can really harm working families who fall behind on small tax bills because they never heard about them or don’t have the immediate ability to pay them.

This happened here once

From 2002 through 2007, Rockville resident Kebreab Zere purchased a series of five tax lots in Georgetown that constituted an alley from 33rd Street NW to Potomac Street, between O Street and N Street.

A private owner bought this Georgetown alley and tried to charge homeowners to use it. Image by Google Street View used with permission.

Unlike most alleys in Georgetown, this alley is a "private alley". The land that makes up the alley is owned by individuals, not DC. The city is not responsible for maintaining the alley and, crucially, the landowners need to pay taxes on the land.

Similar to the San Francisco street, the Georgetown alley had only a nominal tax bill. As of today, the annual tax for all the five lots together is only about $100. But for reasons described below, the bills were not paid for decades.

When landowners fail to pay taxes in DC, eventually the city auctions off a tax lien. Whoever wins the auction is given the right to foreclose on the landowner and eventually take ownership of the property. It's a long process, and at many points along the way the landowner can simply pay the overdue taxes and the lien evaporates. But of course that only happens if the landowners get notice.

That is what happened with the Georgetown alley. Zere ultimately paid $25,204.67 total for the five auctions. Four of the five lots were owned by a woman who inherited the lots from her mother in 1984. Curiously, her mother—who owned one of the homes on N Street—obtained the lots through a tax auction in 1963. According to a brief filed at DC Superior Court, the daughter attempted to dedicate the property to the city to convert it to a public alley in 1985. However it was apparently not accepted. Nonetheless, in 1988 the DC Surveyor recommended that the alley be declared public due to the continued use. Taxes stopped being paid in 1997.

The five lots Zere purchased (highlighted in black) are used as an alley. Image by DC Office of Planning.

The fifth lot was owned by Allan Ramsey Wurtele. He too lived in one of the N Street homes and was an inventor, author and lieutenant commander. He also died in 1947. In sum, none of the lots were owned by the current adjacent landowners. So when Zere was foreclosing on these lots, he was foreclosing on a woman who had essentially abandoned the property and dead man.

After he secured ownership of the property, he applied to erect fences at either ends. This would essentially block access to the garages of the homes along N Street and O Street He told the Georgetown Current that "I need security. People are trespassing." He also mentioned, just by-the-by, that he'd be happy to sell the lots to these homeowners.

It does not take a particularly cynical mind to figure out what the game here is. Buy up essentially abandoned lots with no apparent value and you can extort a pay-off when you go to restrict access. In fact, Zere listed the lots for sale for $350,000 while he was attempting to erect the fences.

Unfortunately for Zere, he brought a butterknife to tank battle. Strict historical preservation rules in Georgetown meant that he could not simply erect the fence and use that as leverage. And despite having full title to the land, this was a clear case of a prescriptive easement, meaning that neighbors have a right to use the land because they’ve been using it for decades. The city sued Zere to enforce the easement. Coincidentally, just last month a DC Superior Court judge issued a summary judgment against Zere deciding that a prescriptive easement in fact exists, and ordering Zere to keep access open to the alley. Now all he holds is title to essentially worthless land.

Tax laws make it easy to exploit people, especially poor people

Which brings us back to San Francisco and Tina Lam and Michael Cheng's purchase of Presidio Terrace. It is not clear whether an easement will be found to exist, or whether the homeowners’ association rules will govern the Lam and Cheng's use of the land. Like the situation in Georgetown, land ownership doesn’t guarantee anything, and I will not be surprised at all if the adjoining homeowners quickly snuff out any attempts to capitalize on the newly purchased street.

But a larger concern is at play here. In Georgetown, these lots fell into Zere's hands because they had essentially been abandoned decades ago. In San Francisco, the tax bills went unpaid because they were allegedly sent to the wrong address. These cases involve extremely wealthy neighbors who can marshal assets to defend their interests. However, tax auctions happen all the time, and much more commonly involve far more modest properties owned by far less wealthy individuals. In one case in DC a 74 year old man lost his house over an unpaid $134 tax bill.

The purchasers of these liens are not really different from Zere, Lam or Cheng. They're investors who see an opportunity in other people's mistakes or failings. Cities should take extraordinary measures to make sure this opportunity doesn't result in a token bill causing individuals to lose something of far greater value. DC passed legislation in 2014 to limit abuses of this process, but opportunities to abuse the system remain.

Shed no tears for Georgetown or Presidio Terrace residents. They will be fine. But these incidents only illustrate how much less fortunate people have to lose from misplaced tax bills.