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“Co-opting” out of higher tax rate?

JOHNSON COUNTY– A fairly recent trend has brought tax savings to some apartment owners, and local governments are worried about the potential impact to their own bottom lines.
Iowa City Assessor Dennis Baldridge and Johnson County Assessor Bill Greazel attended a joint meeting of local governments last week to warn them of the potential tax loss when building owners convert their apartment buildings to cooperatives, in order to change a building’s tax classification from commercial to residential. Residential properties are subject to a statewide tax rollback, so owners pay taxes on only 48 percent of a property’s assessed value. Commercial properties are taxed on 100 percent of the valuation.
According to information passed out to the assembly last Wednesday, Aug. 24, if all of Iowa City’s current apartment buildings converted to co-ops to be classified as residential, it would mean a total tax loss of $7.55 million to the taxing entities of Iowa City, Johnson County, the Iowa City Community School District, Kirkwood Community College, the Iowa City Assessor, the Ag Extension Council and the State of Iowa.
North Liberty’s current inventory of commercial apartment properties are valued at approximately $10 million to $11 million, said Greazel.
“If all of them would go co-op, divide that about in half. That would be your loss in (tax) basis.”
According to North Liberty Building Code official Tom Palmer, as of yet, the City of North Liberty has received no requests for conversion to cooperative status.
The financial finagling gained momentum after a state Supreme Court decision handed down in July backed the housing cooperatives in one Jasper County case.
In Krupp Place 1 Co-op, Inc. and Krupp Place 2 Co-op, Inc, v. the Board of Review of Jasper County, the Supreme Court confirmed earlier decisions by district and appellate courts that the multi-unit apartment buildings should be classified as residential cooperatives, and taxed as residential property. The two members of the cooperatives, Larry and Connie Krupp, were allowed to sublease the 24 units of the buildings, and were not required to reside in the buildings themselves.
Iowa Code chapter 499A allows two or more persons to organize themselves into residential cooperatives. It’s a fairly simple process, said Greazel.
“All you have to do is file a one-and-a-half page [form] saying you are a co-op,” he told the government representatives assembled last week.
Apartment owners find converting to co-op status easier than converting to condominiums, because, unlike condos, cooperatives do not have to comply with certain municipal, county or state building codes.
North Liberty City Council member Terry Donahue finds that provision particularly troubling.
“To make co-ops out of older apartment buildings, and to not have to meet fire codes to protect the general public from hazards, conveys that personal gain is substantially more important than people,” Donahue said in an email communication.
Whether or not everybody will convert to co-ops is still in question, Greazel said. “We don’t know how many people will do it.”
Johnson County Supervisor Janelle Rettig said that kind of unknown could hamper local governments during their annual budgeting process.
“It is a budgeting issue for everyone to think about, because you are going to have to make some sort of prediction about what percentage of these properties will convert to co-ops,” said Rettig.
Greazel encouraged the councilors, school board members, administrators and mayors in attendance to contact their local legislators about the issue.
“My caveat to you would be, if you’re not talking to your legislators about this, next year commercial property tax is going to be a hot item, be sure you contact them and give some input on the front end…because that’s going to have a really significant impact,” said Greazel.
Donahue agreed that it is the city’s role to monitor the issue closely, particularly as it applies to neighboring Iowa City, which has more older housing stock that continues to turn private homes into apartments for the student population.
“This has not been a very visible matter for North Liberty per se, but now the implications are there that it could be,” Donahue said.
Donahue added that North Liberty officials should seek to be better educated on the Supreme Court’s decision, suggesting local assessors might even hold an in-depth workshop on the matter for local governments.
“The city needs a better understanding of what properties are possibly affected, or could be affected, by this ruling,” Donahue said.