Apartments owned by residential cooperatives must be assessed as residential property

by Gary Taylor

Krupp Place 1 Co-op and Krupp Place 2 Co-op v. Jasper County Board of Review
(Iowa Supreme Court, July 29, 2011)

Residential cooperatives are authorized by the Multiple Housing Act, Iowa Code chapter 499A. This chapter generally allows two or more adult persons to organize themselves into residential cooperatives. The determination of whether an entity is a residential cooperative is important because of the favorable tax treatment available for property held by residential cooperatives. Ordinarily, multi-unit apartment buildings are classified as commercial ventures, with owners subject to property tax at commercial rates; however, residential cooperatives are classified as residential property.

Krupp Place 1 Co-op, Inc. and Krupp Place 2 Co-op, Inc. are both corporations organized as multiple housing cooperatives under Chapter 499A, and each corporation has filed its articles of incorporation with the Iowa Secretary of State. Each cooperative subsequently obtained title to real estate designated as Krupp Place 1 and Krupp Place 2. Both properties have twenty-four apartment units. As members of the cooperatives, Larry and Connie Krupp have entered into leases with the cooperatives requiring the Krupps to pay rent to the cooperatives. Neither of the Krupps have ever resided in the cooperative properties. Instead, they have subleased the apartments to subtenants who use the properties for residential purposes. The Krupps use the net rental income from subtenants to pay the rent they owe to the cooperatives under the proprietary leases. The cooperatives in turn use the rent paid by the Krupps to meet cooperative expenses. Any net income left after payment of expenses is retained by the cooperatives as they are prohibited by Iowa Code section 499A.4 from distributing net income to its members.

On March 18, 2008, the Jasper County Assessor mailed Larry and Connie Krupp a notice of the 2008 Real Estate Assessment Roll for Jasper County wherein the cooperative real estate was classified as commercial real estate for property tax purposes. The cooperatives appealed this classification to the Board of Review of Jasper County. The board adjusted the assessed value of the properties but did not alter its classification of the properties as commercial. The cooperatives appealed the board’s decision to the district court. The district court recognized that under Iowa Code 441.21(11), “all land and buildings of multiple housing cooperatives organized under chapter 499A” are to be classified as residential property for tax purposes. The district court, however, concluded the Krupps had not complied with “the spirit of the law.” Although the district court found that the real estate fell within the definition of a multiple housing cooperative under chapter 499A, it stated that like any corporation, the corporate entity may be disregarded and the corporate veil pierced if the entity is a sham or if corporate formalities are not followed. The court noted that there was no evidence of the existence of any bylaws, or that corporate meetings had ever been held.  While the district court recognized that members of a housing cooperative have the power to sublease their units under Iowa Code section 499A.5, the district court concluded that the manner in which Connie and Larry Krupp have “subleased” the premises “reeks of impropriety.” The district court was concerned the Krupps may have been making a profit as a result of the arrangement, something cooperatives are not authorized to do under Iowa Code section 499.1. The district court concluded that the facts revealed “two people, seeking to minimize their tax liability, forming a shell multiple housing cooperative under chapter 499A while actually operating a standard rental property.” The district court affirmed the board’s determination the real estate held by the cooperatives should be taxed as commercial property. The Krupps appealed.

The Iowa Supreme Court disagreed with the district court.  The Court examined the language of Iowa Code 441.21(11) and determined that it imposes only an “organizational test”; that is, property owned by residential cooperatives is required to be classified as residential property.  The assessor and board of review are not permitted to consider a property’s actual use in classifying the property for tax purposes. “When the language of a statute is plain and its meaning clear, the rules of statutory construction do not permit us to search for meaning beyond the statute’s express terms…. As a result, we agree with the cooperatives that the legislature did not create an ‘actual use’ test in section 441.21(11).

Note:  The Iowa League of Cities filed a brief in support of Jasper County.  The League’s posted this response to the court decision on their website:  The result of this decision is that the residential rollback will apply to these coops, despite the fact that all the units in the co-ops are owned by Larry and Connie Krupp and are subleased to other parties. The outcome in this case will likely encourage the owners of other apartment buildings to similarly convert their apartment buildings to “co-ops” to take advantage of the residential rollback, resulting in further erosion of property tax revenues for cities.

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