Landlords want ‘co-op’ status to lower taxes; cities, schools could lose millions in revenue

James and Becky Buxton believe they converted the four apartment buildings they own into housing cooperatives, but the city of Iowa City disagrees.

The discrepancy is important because, as co-ops, the buildings would be classified as residential property rather than commercial, as apartments are, and the Buxtons' property tax bills would be cut in half with the state rollback on residential property taxes.

“You can call me a lot of things, but don't call me someone that wants to pay more in taxes than I absolutely have to,” said James Buxton.

The Buxtons are part of what assessors statewide say is a trend of apartment building owners trying to get their properties reclassified as co-ops.

The owner of an apartment building 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.

Some city officials argue that in a co-op, occupants, as members of the cooperative, should own and manage the units without profit, and they say the co-ops they object to are run the same as commercial apartments.

Such co-ops have been accepted in some jurisdictions, including Cedar Rapids and Polk County. Others, like Iowa City, are resisting. A Jasper County lawsuit over the matter has gone to the Iowa Supreme Court.

The Iowa League of Cities says tens of millions of dollars are at stake.

The Iowa City assessor estimates that if every commercial apartment building was classified as a residential co-op, the city would be out $3.7 million this year, the Iowa City school district nearly $3.1 million and Johnson County $1.5 million.

If that happened in Cedar Rapids, the city would lose $1.4 million, Cedar Rapids schools $1 million and Linn County $547,270.

Iowa City Mayor Matt Hayek said an apartment building usually is a for-profit venture, yet state law permits it to be structured as a co-op or condominium to avoid commercial property taxes.

“The resulting loss of tax revenue to schools, cities and counties is incredible, and it's unfair to commercial property taxpayers who pay a much higher amount,” he said.

Co-op conversions are relatively new - Cedar Rapids and Iowa City have had a handful of such requests annually the past couple of years - but it's similar to what's been going on for years with condominiums.

Condos and co-ops are taxed as residential, and the state-set “rollback” says less than half a residential property's assessed value is taxed. Commercial property is taxed at 100 percent.

The advantage of going co-op is that, unlike condos, they don't have to be brought up to current housing codes when converted, which takes time and money.

Cities have unsuccessfully lobbied the Legislature to pass a law that taxes non-owner-occupied condos as commercial.

Scott Labus, city of Cedar Rapids assessor, said he believes state law leaves assessors little wiggle room to deny a co-op request. Even a Cedar Rapids mobile home park was reclassified this year.

Jeff Rehman is a property manager for two buildings on Rushmore Drive NE in Cedar Rapids that were recently switched from apartments to co-ops with no major problems. He noted that many new multiunit buildings are classified as condominiums or co-ops and it's only fair that older buildings be treated the same.

“How can you say this one is and this one isn't?” he said.

That's a question James Buxton is asking in Iowa City.

“As far as I'm concerned, the city assessor in Iowa City is acting like we're in a different state than just 30 miles north up the road,” he said.

The Iowa Court of Appeals in December ruled 2-1 in favor of the owners of two buildings in Newton that were denied reclassification as co-ops. The majority opinion said that they complied with state law in creating the co-ops and that the law does not require co-op members to live in the building or prevent them from subleasing.

Jasper County Attorney Mike Jacobsen said he believes the buildings are commercial enterprises that went co-op just to get the residential classification for tax purposes.

The dissenting judge in the case, David Danilson, wrote that the Iowa Supreme Court has said a co-op generally is a multiunit dwelling in which each resident has an ownership interest and a lease for an apartment in the building. He noted that Larry and Connie Krupp were the only two members of the co-op and each owned multiple units.

The Iowa Supreme Court has decided to weigh in, although a date for the case to be heard has not been set.

Iowa City and the Iowa League of Cities recently filed a friend of court brief in support of Jasper County. They argue state law allows each co-op member to have a lease to one apartment only.

Krupp attorney James Nervig said he understands why cities are concerned about the possible loss in taxes, but said if that's considered a loophole in the law, it should be taken up with the Legislature, not the courts.

The Des Moines City Council took some action on its own, recently passing a law requiring that buildings converted to co-ops meet current building codes, just like condos.

That may keep some property owners from converting, but Randy Ripperger, Polk County's deputy chief assessor, believes the practice will continue to grow.

“Everybody wants that coveted residential classification,” he said.