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Wacha letter: Condo conversions hurt Ames

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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.
 

Deception as policy

Congratulations Mr. Wacha for speaking out on this issue. Your question as to whether the practice is "right" despite its being "legal" is an important one. We all realize you are just one member of the City Council but it would be interesting to know where the rest of the Council stands on the issue. Your concern that the use of a legal loophole "to increase profits of a few at the expense of the community as a whole" is shared by many citizens in Ames. The Golden Rule seems to be at work here... He who has the gold, makes the rules. Once again, thank you for having the courage to confront one of the groups "who have the gold". We'll be watching to see how this evolves. And by the way, you needn't worry about the apartment owner's support of you as a candidate in the future if you can show the majority of potential voters that you care about the whole community and not just a few monied interests.

So tell me what can the city do??

Mr Wacha, you said "I believe the city needs to act if the state continues to refuse to do so".

So tell me what can the city do??

Is this just political posturing?

RE: “So tell me what can the city do??”

Thanks for your question. There are opportunities to get developers to agree to certain conditions when they come before the City Council with a request. The city often gets conditions upon rezoning (conditional rezoning) and at other times when building projects need to request certain items from the city. I’ve been a vocal opponent of adding requirements to building projects in general and am very cautious about making special cases, however as a last resort to correct an inequity such as in this case I believe it is the right thing for the city to do.

If you think my comments are political posturing you certainly don’t know me very well. The politically easy thing for me would have been to say nothing… by responding to the article I’ve publicly called out some of my biggest supporters. Why do that? Because I believe it’s the correct thing to do. I was elected to listen, ask questions, keep an open mind, work hard and make the best decisions possible based on available information… not to make friends or make decisions based on how it may help me politically.

Sincerely,

Thomas Wacha

Actually

You might all want to review State Code regarding this. The classification, as referenced above, is not likely a covenant which can be attached to a parcel of land to determine its classification for property tax assessment purposes...especially when it pertains to a property transfer.
Additionally, what concerns me most about this, is that this will ultimately result in an increase in property tax revenue to the City. Instead of "raising revenue through property classification readjustment", lets look at cutting the low-hanging fruit from the City budget. There are plenty of areas which can be trimmed-back. Regardless of whether or not people agree with apartment classifications for property tax assessment, we should not be wanting to tax our citizenry more and more. Each of us have to live within our means and we just can't go tell our boss that "I need $1000 more this month so I can pay my bills." You and I live within a budget and, if you're like me, you save a little too. Perhaps the City should do the same and quit taxing us all (you, me, everyone) at higher revenue rates. Although the City has a "lower" levy rate, the reason for this is our high property values in the community. We should be thankful for what we have and quit appologizing for what we don't have.

Well Said

A condo by definition must be available for sale as an individual unit. Anything less is a deceptive business practice that uses a tax loophole to cut property tax in half. This hurts our schools, law enforcement and fire services. If a property will not sell an individual unit to a buyer, the tax designation should revert to commercial. It may be legal, but it ain't right!!!

Condo vs apts

Condos are lived in and owned by the owner and apartments are rented from someone else who owns the property. This "legal" condo conversion is nothing but a tax dodge and the law should be changed. If enought tax payers protested then maybe some thing could be changed in the Iowa Legisature next term.

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