Photo courtesy of City of Ames
By Tom Wacha, Ward I
Ames City Council
(July 22, 2011) I'd like to respond to your July 21 article titled "Public entities missing out on tax revenue due to condo conversions". I do so as a taxpayer and individual member of the Ames City Council; my thoughts in no way reflect the thoughts of the Ames City Council as a whole.
The article does a good job of providing an overview of the issue of apartments (classified as commercial property) being converted to condominiums or calling themselves a co-op (both classified as residential property) in order to take advantage of the residential property tax roll back. The result is millions in lost tax revenue each year for the city of Ames, with an estimated $4.65 million for FY 2011-2012 alone.
How big of a deal is this? If the loss in revenue were to be made up by residential property taxes (which it is not), it would equate to an additional $187 per $100,000 in assessed valuation for residential properties each year. A big deal, especially given the budget challenges that the city and school districts have and will continue to face.
Although this issue was not on my radar when I ran for city council in 2009, it has become a very high priority for me. Apartment owners who have classified their apartments as condominiums are deliberately manipulating a tax loophole that unfairly shifts the property tax burden from for-profit companies to residential homeowners.
The above referenced article interviewed a property manager who stated that the tactic was legal and created by state law. Both statements are in fact true, however no state law directly allows for this practice, rather a combination of less than thorough state laws make the practice possible.
The Iowa Code classifies buildings with three or more separate living quarters as commercial property.
This definition makes sense for apartments owned by a single person or company and being rented for the profit of that person or company. On the other hand we have condominiums, which can be thought of as multiple single-family homes that share common elements such as walls, floors, roofs and land.
Condominium units themselves are individually owned with the common elements belonging to all of the owners jointly and are thus considered by the Iowa Code as residential property. Because condominiums serve an important need in any housing market, Iowa code chapter 499B allows for the establishment of these structures, legally known as "horizontal property regimes". Since the writers of chapter 499B saw the legitimate possibility that existing apartment owners may want to sell off each apartment and form a condominium, a means to convert was also included.
Then someone realized that the actual legal description of apartment and condominium were similar enough that one could be called the other without making any changes to the building or its operation, allowing the owner to take advantage of the residential classification and as a result only pay property tax on 48 percent of the assessed valuation instead of the full valuation.
While the case was focused on the legality of taxing apartments and condominiums at different rates and thus not directly related to the issue of "condo conversions", the Iowa Supreme Court ruled in Timberland Partners XXI, LLP, Edward L. Hendrickson and James C. Conlin v. Iowa Department of Revenue that there were several significant differences between apartments and condominiums. These differences included:
* Condominiums can be sold as single family units,; apartments can not.
* Condominiums constitute a "separate parcel of real property"; apartments do not.
* Condominium owners can participate in the management of the complex,; apartment tenants cannot.
* Condominium owners usually occupy the condominium; apartment owners usually do not.
Yet the loophole remains. So you decide... it’s legal... but is it right?
Lets look at an example. "Crystal Cove Condos" in Ames is a series of three, three story buildings with a total of 96 individual units. All are owned by Crystal Cove LLC, all are available for rent and a quick Internet search will find the term "condos" used only on the owner’s website. Yet they are legally considered to be condominiums. These are nice buildings in a good location in south Ames... so if you're interested call a local real estate professional and inquire about purchasing one of the units and see how far you get. Make no mistake... these, and the hundreds of others like them, are apartments in every sense of the term, not condominiums.
I have no issues with apartment owners or apartments in general. I know many of the largest apartment owners personally and several have supported me as a candidate. However, I do have an issue with the use of a legal loophole solely to increase profits of a few at the expense of the community as a whole. The property tax system in Iowa needs to be revamped, but that is work best left to our state leaders, not individual apartment owners.
Lastly, the belief that removal of this loophole would put more burden on apartment tenants is an attempt at masking the real issue. While affordable housing is a concern in Ames, the free market would force apartment owners to make up for the difference from their profits if they expected to keep those tenants from simply moving to one of the many other apartment complexes.
As but one member of the Ames City Council, fixing this problem for good is beyond my ability. However I believe it is my duty to continue to raise awareness of this issue and work to prevent these conversions from occurring on a case-by -case basis as the law allows. I believe the city needs to act if the state continues to refuse to do so.