Supreme Court splits on Iowa City cooperative rental housing cases

An Iowa Supreme Court ruling shows that Iowa City landlords can save big bucks if they have their paperwork in order to reclassify their apartment units as cooperatives.

Iowa Supreme Court opinions released on Friday found one winner and one loser on this front. The court said one Iowa City rental housing complex is eligible for the lower residential property tax rate of a cooperative, while a second does not meet the conditions and must pay the more expensive commercial property tax rate.

In a 5-2 ruling, the Supreme Court reversed a district-court decision and sided with the Iowa City review board against Dolphin Residential Cooperative, saying it had not properly organized 22 apartment buildings as residential property for tax assessment purposes. The ruling cost Dolphin, which is on the southeast side of Iowa City, about $110,000 a year.

'Let's begin with the underlying reality of what is going on: An Illinois-based commercial landlord is leasing out 400 apartment units in several buildings for profit,” Justice Edward Mansfied, wrote in a special concurring opinion.

In a cooperative, members come together to jointly own an entity. In these types of housing cooperatives, the members can then sublet to renters. Except for more traditional housing cooperatives, a tenant would notice little difference renting at a cooperative versus a traditional apartment.

Except for more traditional housing cooperatives, a tenant would notice little difference renting at a cooperative versus a traditional apartment.

Mansfield wrote the landlord in the Dolphin case had taken on some of the 'trappings” of an Iowa cooperative. One member, Dolphin International, LLC, is assigned 399 units, and the other, RBJ Management, Inc., is assigned one unit, but the cooperative, Dolphin International, and RBJ, are all under the direction of one person, Vijay Bhatt.

'We have here ... a single economic enterprise purporting to be divided into independent units in order to get favorable tax treatment,” Mansfield wrote.

A 2011 Iowa Supreme Court ruling in Krupp Place 1 Co-op, Inc. v. Board of Review opened the door for landlords to reclassify apartments as cooperatives. If organized properly, the landlords in a cooperative stand to save thousands of dollars in taxes, paying roughly half as much as apartments classified with a commercial assessment.

Towns with large rental markets, such as Iowa City, had resisted reclassifications to cooperatives with a prospect of losing millions of dollars.

In the other case, Iowa City appealed an Iowa City Board of Review ruling, which reclassified 18 properties held by 11 multiple housing cooperatives as residential. The Supreme Court affirmed the District Court ruling in siding with the review board.

The court said the corporations of Myrtle Grove Housing, Inc., and Prestige Properties had properly organized as a cooperative, dismissing Iowa City's challenge that the members had to be humans. The residential classification saves the businesses $145,000 in taxes per year.

Eric Goers, Iowa City assistant city attorney, said most landlords interested in reclassification would have already done so, so the ruling is likely to have minimal impact in this rental-heavy college town. Furthermore, the Iowa Legislature's 2013 commercial property tax reform bill makes it a moot point

'State legislature passed multi-residential housing classification meaning any property designed for human habitation will get residential classification in the next six or seven years,” he said.

The changes to the commercial property tax code will cost Iowa City $40 million over 10 years, Goers said.