Iowa’s commercial property owners face tremendous property tax expense in every jurisdiction. Local taxing authorities are adding huge increases on increasingly frequent basis. As with any significant cost of doing business, the tax burden can make the difference between a profitable and a non-profitable investment. Surprisingly, many owners fail to avail themselves of relatively quick and inexpensive tools to reduce their property tax exposure.
Tax reductions made easy
Usually, the first step in a traditional property tax challenge comes in the form of an appeal of the entire assessment to a local board of tax assessment or tax review. Often, owners of the more significant properties retain counsel to represent them at this step of the appeal process. Many times, the property tax lawyer can obtain a 20percent to 40 percent reduction in the assessed value of commercial housing assets such as apartment complexes, senior housing or assisted living facilities. Occasionally an appeal to a district or a statewide board of tax appeals becomes necessary.
The reduction in the assessed value from these proceedings can result in a corresponding 40 percent reduction of real estate taxes on an ongoing basis. In other words, the tax savings from the reduced assessment is not a one or two year proposition but generally stays on the books year after year, almost into perpetuity.
Often the property tax appeal will be undertaken based on a contingency fee arrangement so that there is minimal cash outlay to the taxpayer while the appeal is pending. Even though appeals have tangible benefits, many owners do not pursue them out of
concern for the time and effort involved, uncertainty as to the outcome and potential attorneys and appraisers fees.
Under Iowa law, owners can easily get a significant reduction in property taxes by finding increased usage for the property. This quick and easy practice addresses concerns about time and effort for the appeal and uncertainty as to the outcome.
An owner can file a property tax appeal and convert the property to a cooperative or condominium while the appeal is being considered. By reclassifying a commercial property as residential, the taxing authorities will reduce as much as 50 percent of the taxpayer’s obligation as a “holdback”. In Iowa, the tax authorities offer a large holdback for residential properties and virtually none for commercial.
The conversion process
To become a cooperative in Iowa, a cooperative corporation must be formed, which requires the creation of a corporation (minimum of two people, a majority of whom are citizens of Iowa). The developer/sponsor usually controls the board of directors until a certain percentage of the cooperative memberships have been sold (the statute caps the percentage at 75). |
The primary distinction between a housing cooperative and other forms of homeownership is that, in a housing cooperative, the owners do not own the real estate. The cooperative corporation owns the real estate and each member of the corporation owns a share in the corporation. Each membership entitles the member to an exclusive right to live in a specific unit (established through an occupancy agreement or proprietary lease) for as long as the member wishes. It sets forth the rights and obligations of the member and the cooperative to each other. Legally, the membership is viewed as a lease with the housing cooperative.
Ownership of a share and the ability to occupy a unit may not be separated. Each unit carries with it one vote in the decisions of the corporation. A cooperative operates for the benefit of its members on a nonprofit basis in order to provide the goods and services members need at the lowest practical cost. Each month the members pay an amount that covers their share of the operating expenses of the cooperative corporation.
The cooperative provides a distinct advantage over the condo format. The cooperative presently has no requirement to upgrade to current building codes at the time of the conversion, whereas, condominium conversions must be upgraded to current building codes. For cooperatives, this can be a significant savings depending on the age of the property.
Avoiding the local code
Oddly, even in Iowa, enforcement of these provisions by the local jurisdiction varies. The Iowa Code does not include any provision that dictates how these provisions are to be enforced or the consequences of complying with these provisions. Even if the local jurisdiction takes no action to enforce the law, any purchaser of the entire property or of an individual unit could raise a title objection based on the failure to comply with the law.
Thus, forming a cooperative creates no risk of failing to comply with the provisions of the law, either from governmental actions to enforce these provisions or from title objections. These facts make the cooperative approach the preferred method to obtain tax savings.
On the whole, cooperatives offer the same tax treatment as condominiums (primarily the benefit of the roughly 50% rollback for residential conversions) without the difficulties that can arise from condominium conversions. At this time, given the advantages, the use of the cooperative conversion is,
understandably, increasing and commercial property owners are enjoying the benefits of substantial property tax savings.
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