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The LaGrange City Council is considering limiting the interest that accrues on liens placed on properties to pay for the demolition of unsafe houses.

The council is considering limiting the total interest to allow the liens to be taken off the books and potentially have the properties rehabilitated.

City Attorney Jeff Todd said that when unsafe houses are torn down by court order, the owners sometimes do not have the resources to pay for the demolition, so the city will place a lien on the property to pay for it.

The process was started by state law in the early 2000s as a way to get rid of unoccupied, extremely substandard housing that is rife with title problems or has out-of-state owners, Todd said.

“This statute gives the city the ability basically to take that property to municipal court and put up evidence as to how awful it is,” Todd said. “Then, the court usually grants an order giving the owner — if they show up — the opportunity to repair it if they like, or if not, tear it down. If the owner fails to tear it down and the city ultimately does, then a lien attaches for that amount.”

Todd explained that the issue is that compounding interest on the liens can often make it not worth paying off.

For example, a lien from several years ago that started at $5,000 with interest compounding every year at prime plus three, when you compound the interest, could be $10,000 or more, which could be more than the property is worth, Todd said.

“By law, the interest accrues at prime plus three, because these are treated like tax liens,” Todd said.

The prime interest rate is set by the federal government, so “prime plus three” would be that rate plus three percent.

Todd said they don’t have the ability to settle the liens at a lower rate without direction from the council.

“We don’t have the authority to compromise on that. [City Manager] Meg [Kelsey] doesn’t have the authority to just compromise the judgment without having council input,” he said,

City staff proposed limiting the interest to a total of 15 percent so that liens can be removed rather than just sitting on the books after their accrued interest makes the properties not worth paying off.

If someone pays the lien off quickly, they can use the cheaper prime-plus-three rate, Todd said.

The potential change would not apply to property tax liens, which the county can use to auction off properties when taxes go unpaid.

Todd said that if the rule is approved it would have to apply to everyone or no one, so the city cannot use a means test.

“Of the hundreds of these that we’ve filed, we probably haven’t gotten paid 20 or 30 times in the last 20 years,” Todd said.

The city would potentially be giving up the opportunity to get the full interest, but it could also allow for more lots to be recycled and put into development.