by Gary Taylor

City of Iowa City v. Iowa City Board of Review
Iowa Supreme Court, May 15, 2015

Iowa Code 499A.1(1) provides in relevant part:

Any two or more persons of full age, a majority of whom are citizens of the state, may organize themselves for the following or similar purposes: Ownership of residential, business property on a cooperative basis.  A corporation is a person within the meaning of this chapter.

In May 2012 the Iowa City Board of Review sent notices to 18 properties indicating the board changed the classification for those properties from commercial to residential for property tax purposes.  They were reclassified because they had been recently organized into multiple housing cooperatives.  The City of Iowa City filed a notice of appeal with the district court, objecting to the Board’s reclassification.  All parties agreed that two Iowa corporations organized each of the multiple housing cooperatives for the purpose of owning residential property in a cooperative. The City argued that the Board’s reclassification was improperly because (1) two natural persons, not two corporations, must organize multiple housing cooperatives under the Iowa Code, and that (2) the Iowa Code requires a one-apartment-unit-per-member ownership ratio for a multiple housing cooperative to be properly organized.  The district court granted summary judgment in favor of the Board and the City appealed.

Need for natural persons to organize cooperatives.  In Krupp v. Jasper County Board of Review the Iowa Supreme Court held that the proper test for determining if a property could be classified as residential is whether the multiple housing cooperative was properly organized, not the actual use of the property.  After examining the language of Section 499A.1(1) the Iowa Supreme Court concluded that a natural person need not be one of the organizers of a multiple housing cooperative.  The phrases “persons of full age, a majority of whom are citizens of the state” and “a corporation is a person within the meaning of this chapter” are not inconsistent with each other.  The Court said that “the intent of the General Assembly … was to put the same restrictions on corporate organizers as it did on persons who organized multiple housing cooperatives; [that is] the corporate organizers must have the authority to organize a multiple housing cooperative and a majority of the corporate organizers must be Iowa corporations. Had the General Assembly intended to adopt the City’s position…[it] would have said a corporation could organized a multiple housing cooperative only with two or more natural persons….”

One-apartment-unit-per-member ownership ratio.  The City read Iowa Code 499A.11 to require this ratio.  It reads in part

The cooperative has the right to purchase real estate for the purpose of erecting, owning, and operating apartment houses or apartment buildings. The interest of each individual member in the cooperative shall be evidenced by the issuance of a certificate of membership. The certificate of membership is coupled with a possessory interest in the real and personal property of the cooperative, entitling each member to a proprietary lease with the cooperative under which each member has an exclusive possessory interest in an apartment unit and a possessory interest in common with all other members in that portion of the cooperative’s real and personal property not constituting apartment units, and which creates a legal relationship of landlord and tenant between the cooperative and member. The certificate of membership shall be executed by the president of the cooperative and attested by its secretary in the name and in the behalf of the cooperative.

The Court stated that Section 499A.11 is not an organizational statute; rather Section 499A.1 is the statute that states the requirements that must be satisfied to organize as a multiple housing cooperative.  The Court refused to glean a one-apartment-unit-per member ratio requirement from Section 499A.11, instead finding that it requires only a coupling of ownership and membership interests.  “Put another way, while section 499A.11 certainly requires that each apartment be linked with a corresponding membership interest, there is nothing prohibiting one person from holding ownership and corresponding membership interest in more than one apartment unit.”

The Iowa Supreme Court affirmed judgment for the Iowa City Board of Review.

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.