Iowa Supreme Court rules for housing co-ops

An Iowa Supreme Court decision will lower taxes for some property owners, although that in turn will result in less money for local governments.

The court on Friday upheld district court and Iowa Court of Appeals decisions allowing two housing cooperatives in Newton to be classified as residential property in a case with statewide implications. (Click here to read a story from last year about the case.)

As residential property, the co-ops would have their taxes reduced by more than half because of the state-set rollback on residential property taxes. In the current fiscal year, 48.5 percent of a residential property's value is taxed, compared with 100 percent for commercial property, like apartments.

The case, Krupp Place 1 Co-Op and Krupp Place 2 Co-op vs. the Board of Review of Jasper County, was a defeat for tax-collecting entities like cities, counties and schools. The Iowa League of Cities has said tens of millions of dollars in property tax revenue could be lost with buildings that some people contend are apartments being converted to co-ops.

“In this economic situation with cities struggling to keep their heads above water, this is not encouraging news,” said Terry Timmins, an attorney for the Iowa League of Cities, which along with the city of Iowa City filed a friend of court brief in support of Jasper County.

Assessors say they've seen more apartment buildings trying to convert to co-ops in recent years. A similar trend has occurred with apartments being classified as condominiums, but co-ops don't have to be brought up to current housing codes when converted like condos do, which saves time and money.

Some communities, including Iowa City, have resisted reclassifying some co-ops that they say are essentially the same as commercial apartments. Other towns, including Cedar Rapids and Polk County, have granted co-op requests, saying the believed the law left them no choice.

In an apartment building, the owner leases individual units for profit. A co-op must have at least two members, and members are granted the right to occupy units, which they can sublease.

In the case that went before the Iowa Supreme Court, Larry and Connie Krupp were the only members of the co-op and subleased the units in the two building. They did not live in either building.

Jasper County argued that the co-op status was sought solely for tax purposes and that the Krupps treated the buildings as rental property.

In its 6-0 ruling, with one justice abstaining, the Iowa Supreme Court said Iowa Code requires properly organized residential co-ops to be classified as residential property and taxed at residential rates. There was no dispute that the Krupp co-ops were properly organized.

The court also said state law requires co-ops to operate on a nonprofit basis but does not prohibit a member from leasing out units with “desirable economic terms.”

“In this case it's just crystal clear, you shall be classified residential if you are a 499A cooperative,” Krupp attorney James Nervig said, referring to the chapter of Iowa Code dealing with co-ops.

He also said it's important not to lump all co-ops together. Many have members who live in them and are not like a typical apartment complex, he said.

He expects the Iowa League of Cities to seek a legislative remedy and to look for loopholes that would allow assessors to deny some co-op requests.

Timmins said league officials have not time to decide what their response will be. Co-ops likely will come up during training sessions with cities, but more as advice rather than telling them what to do, he said.

Getting the Legislature to act could prove difficult. Cities have unsuccessfully lobbied state lawmakers to pass a law that taxes non-owner-occupied condos as commercial, and property tax reform currently is a touchy subject at the statehouse.

Iowa City has had a handful of requests for co-op conversions each of the past three years, which it has denied, Assessor Dennis Baldridge said. His said the Iowa Supreme Court decision likely means those buildings will get the residential classification.

He expects more reclassification requests to come now that the state's highest court has weighed in, but Baldridge is not sure how many more there will be.