Apartments reclassified as condos, costing cities a lot of dough

Thousands of people living in apartments in the Corridor may not know it, but their homes have become condominiums.

A legal shift - one that flips a property's classification from “apartment” to “condo” - is saving landlords in Cedar Rapids and Iowa City a bundle on property taxes, while also erasing hundreds of thousands of dollars in tax revenue for local government each year.

“There's a loophole in the law, and they've found it,” said Linn County Assessor Julie Kester.

Apartment buildings are commercial property. Condominiums are considered residential.

In Iowa, where residential property is taxed at less than half its assessed value, switching a property from commercial to residential is a no-brainer if you can swing it. Apartment owners are swinging it, while renting the units like apartments.

Since Jan. 1, 2008, 36 apartment buildings in Cedar Rapids have been converted to condos, cutting $600,000 in tax revenue for the city, county and local school district.

In Hiawatha, Marion, Ely, Coggon and the rest of Linn County, 64 former apartment buildings worth about $30 million are now condominiums. Local governments and schools lose roughly $500,000 per year in tax revenue as a result.

In Iowa City, these newly converted “condos” have replaced apartments, as a rule.

Iowa City Assessor Denny Baldridge said Johnson County was one of the first places apartments started changing into condos, and assessors at first tried to resist.

“We don't get a (new) apartment building that they don't file condo papers on,” Baldridge said. “The apartment owners feel that that's a very legitimate way of doing business, and I think the assessors have come to accept that.”

The word “condo” suggests owner-occupancy, beachfront property, a brick duplex in the suburbs or a downtown loft. The new wave of condos in the Corridor, however, is nothing of the sort.

One big property in Cedar Rapids that switched from apartments to condos is the Westdale Court Apartments, a 22-building lower-rent complex on the west side, worth $12.5 million as a commercial property. The 176 units were converted to condominiums in 2008 and reassessed at a combined $19.4 million once the deeds were separated out.

Despite the 55 percent increase in value, the state's residential “rollback” tax break meant the owners now pay $143,000 less in property taxes each year. The property is owned by Westdale Capital Investments; the company's president, Barry Smith, could not be reached for comment.

Here's how it works:

Take an apartment complex in Cedar Rapids worth $1 million. The property tax rate in Cedar Rapids is $36.31 per year for each $1,000 of value. For a commercial building, that's $36,310 in property taxes each year.

Residential property is taxed at only 45.6 percent of its assessed value. So owners of apartments file paperwork to convert each apartment to a condo, making it residential. They then rent the units the same as before and pay only $16,553 in property taxes each year.

“There's nothing in the law that says they have to sell those condominiums; they just have to convert it, and they can just rent it out,” Cedar Rapids Assessor Scott Labus said.

Some assessors compensate for this by reassessing each unit at a higher value once it becomes a condominium. This is done in Cedar Rapids and often results in a 50 percent increase in the value of the property. Even with the new assessment, though, the owner sees a tax savings.

Apartment owners are also converting their properties into residential co-ops, which technically splits up the ownership of an apartment building and allows it to be zoned residential. The tax savings are the same, or in some cases better.

Labus said the phenomenon accelerated as the residential rollback deepened.

Property owners point out, correctly, that Iowa's property tax system leans hardest on commercial property owners. As the discount for residential property taxes deepened, the portion of local government revenue covered by businesses increased.

“There has been a property tax burden shift to commercial property owners,” Labus said. “Everybody knows that.”