Investment in multifamily residential and its development would slow and possibly come to a halt if a bill that would increase taxes paid on multifamily properties is approved by the Iowa Legislature, property owners and developers said.

And a leader of a housing nonprofit says the legislation will also hinder economic development, especially in rural areas, by limiting available housing in those communities.

Senate File 2472 was approved by the Iowa Senate on April 8, while the House version, House File 2745, remains in that chamber’s Ways and Means Committee, where a subcommittee held a public hearing on Monday.

Lawmakers were scheduled to adjourn this year’s session on Tuesday, but with differences between the two bills and negotiations continuing between the chambers and the governor’s office, that seems unlikely. 

Key sticking points between the two bills are the House version caps a city’s revenue growth at 2%, while the Senate version ties revenue growth to the consumer price index.

The Senate version prohibits future use of Tax Increment Finance districts without sunsets, and limits future TIF districts to 20 years. The House version limits revenue use for TIF districts without sunsets to 60%, and caps all new TIF districts at 23 years.

The bill changes the rollback that was approved in 2013 and later amended that limited how quickly taxable values can rise, and increases the homestead credit for people over 60, with a phased-in schedule for property tax exemption for people 65 and over who have no mortgage, a provision not contained in the House bill.

The Senate version also includes indexing the gas tax to the consumer price index, as well as allowing local governments to increase local option sales tax from 1 cent to 1½ cents. 

One provision of the Senate version that’s causing consternation among those who buy, sell and develop multifamily properties is the increase in the amount of property taxes they would be required to pay, if approved.

The Senate bill increases the amount multifamily properties are taxed from 44% to 80% of assessed value. 

That would create a burden on property owners and managers and result in increased rents, making it more difficult for low- to moderate-income people to afford housing, said Ryan Cahalan, a partner with Artisan Capital Group, which owns about 4,500 multifamily residential units in Iowa, including 3,000 in the Des Moines metro.

The increased tax burden would also impact loans that were underwritten under the state’s previous tax system, and nearly doubling taxes would be financially damaging, he said.

“It would be extremely impactful because most, if not all of our loans on the underlying real estate will be insolvent or significantly impaired,” he said in an interview with the Business Record. “Our lenders have loan covenants that we would violate by not having sufficient income to service the debt for the underlying assets.”

Cahalan said raising rents would be the only way to offset the increase in property taxes that is proposed.

“If we raise rents, our renters in Iowa have options to go to other properties, but if all multifamily owners are faced with the same thing, they all are forced to increase rents and our ultimate concern is for our residents as the rent will be significantly impacted and increased.”

Cahalan said if taxes double, maintenance could be deferred because of a lack of money, and “without those, properties will fall into disrepair and ultimately into blight in some situations.”

He said Iowa’s property taxes are competitive with neighboring states, but rank second only to taxes levied by Illinois.

Although the LaSalle, Ill.-based Artisan Capital Group doesn’t develop properties, Sean Fogarty, Cahalan’s partner in the firm, said the increase on multifamily residential property tax would make Iowa less competitive.

“It’s already very challenging to develop and underwrite a development now, and if you increase the taxes as proposed, it will halt development in Des Moines and throughout the state and that will only create less supply and stable, if not increasing demand,” Fogarty said. “With the population in Des Moines, that will just put more pressure on rent increases.”

Fogarty said the tax increase on multifamily will lead investors and developers to look to other states.

Artisan Capital Group also owns properties in Cook County, Ill., which Fogarty said is considered one of the most difficult taxing authorities in the region, if not nationally.

“We don’t want Iowa to compete with them in that,” he said. “It’s very difficult to underwrite deals in that market.”

Fogarty said what is proposed in the Senate bill would “catapult Iowa to the highest taxes for the apartment business in the Midwest, and would supersede Illinois, which is one of the toughest, most difficult taxing systems in the country.”

Darryl High, owner of Cedar Rapids-based High Properties, which owns and manages residential properties in eastern Iowa, including Cedar Rapids, Marion, Tiffin and Waterloo, said a report by Maxfield Research & Consulting, suggests that Cedar Rapids needs 4,000 residential units to keep up with growth.

“We’re building about 350 a year, so we’re about 10 years behind,” High said. “That’s today we need them, so the idea that we should raise taxes dramatically in such a quick fashion, I don’t feel like it’s been property vetted and that it is the right move.”

Raising taxes on multifamily residential would lead to increased rents, “and it will make it harder for households to be formed,” he said.

High also said the hike in multifamily residential taxes would make Iowa less competitive nationally.

He cited Tennessee and Texas as two examples where he said taxes are lower and it’s less expensive to build.

“Raising taxes only serves the immediate goal of raising revenue, it doesn’t meet the long-term goal because it slows down growth,” High said.

While property owners and managers are eyeing the impact the legislation would have on multifamily properties, local governments are keyed in on the changes in TIF that are included in the Senate bill.

“One of our largest concerns with both bills is that, as currently written, they would limit our ability and capacity to utilize several TIFs including the downtown TIF,” Des Moines City Manager Scott Sanders said in an emailed statement. “This funding mechanism has played an essential role in the transformation of downtown Des Moines and has been a part of the funding for every successful downtown Des Moines project and development over the past 25 years.”

Dan Garrett, chair of the Iowa Housing Partnership, was also critical of the property tax reform bills under consideration at the Statehouse. The group is a nonprofit advocacy and education organization that promotes affordable housing in the state.

He also raised concerns about deferred maintenance, increased rents and putting loans at risk if property taxes are raised on multi-family properties.

Garrett said the proposed property tax legislation creates a domino effect that will only hurt housing in Iowa.

“We want to cap growth for cities and if someone comes in and wants to do a development knowing they are going to have to pay the property taxes at the level [they] are proposed to go up to, they will go to the community and say, ‘I need a 15-year or 20-year tax abatement,’ so you’re not going to get property taxes from a new development,” Garrett said. 

High construction costs combined with the proposed increase in multifamily property taxes, will mandate the need for a tax abatement, and push the property tax issue onto local communities, he said.

Garrett said that while there is a need for property tax reform in Iowa, he believes the proposed legislation misses the boat and causes more problems than solutions.

One example is the phased-in exemption for older homeowners. 

Garrett said he believes in giving property tax relief to people on a fixed income, but targeting that relief to older residents, many of whom own their homes outright, incentivizes them to stay in their homes longer. That keeps them from selling their homes and maybe moving into senior living apartments, which would allow their home to be purchased by a younger person or family just starting out.

That is particularly challenging in rural areas of Iowa, where many communities already lack housing for older residents who maybe want to sell, he said.

That lack of housing could discourage young people who grew up in Iowa from returning, or from moving here for a job, Garrett said.

“What we’re doing in this effort to try to reform taxes is not looking at how we’re going to grow this economy,” he said. “We’re going to grow this economy by having young people come here and work here.”

Garrett said the tax reform proposals being considered would be damaging, especially to rural counties.

“How are you going to help rural counties when you limit their TIF, you put a limit on their property tax revenue growth, and you’re going to give a tax abatement to probably 40% of the population?” he said. “It’s just going to crush any kind of economic development. And why would anybody want to do a multifamily project?”

Officials with the Iowa Economic Development Authority said the agency does not comment on legislation they don’t propose or administer.

The Senate bill received a cool welcome during Monday’s Ways and Means Subcommittee in the House, where at least one committee member said he could not vote for it in its current form.

Logan Murray, speaking on behalf of the Greater Iowa Apartment Association, said the increase on multifamily residential would impact apartment dwellers, who are disproportionately low- to moderate-income, and on average increase rent by 15%.

“Iowa currently ranks as the fourth least expensive state in the nation for renters with an average rent of $971,” he said. “A tax increase of this magnitude would decrease that competitive advantage.”

“Renters would be paying more while receiving less as necessary improvements to aging housing stock and renovations would be curtailed,” Murray said.

Craig Patterson, speaking on behalf of the Professional Developers of Iowa, saying they are following the process as it relates to the marketability of Iowa.

“We’ve been pushing for simplification, predictability and sustainability in the process  because it helps lure businesses to Iowa,” he said during the hearing.

Patterson described the restrictions on TIF as “dangerous.”

“That would shut down economic development in a lot of parts of the state, so we’d like to see that removed,” he said.

Laura Book, director of government relations and public policy at the Greater Des Moines Partnership, said the regional chamber supports tying revenue growth for local communities to the consumer price index rather than a hard cap of 2%, and allowing communities to increase the local option sales tax. But the Partnership is concerned about restrictions on TIF.

“Preserving the effectiveness of TIF remains a top priority for the Partnership,” she said. “Regional economic development and collaboration create the scale of efficiencies needed to compete for major economic development projects.”

On the gas tax, Nick Laning, speaking on behalf of Truck Stops of Iowa, said the group is opposed to the Senate bill, because it’s increasing the tax at a time when customers need relief.

“Why, when other states are pausing their gas taxes and trying to give relief, are we considering an increase in the fuel tax in this current economic environment?” he said.

Committee member Larry McBurney said he didn’t see “actual property tax relief” in the Senate bill.

“I do see a huge shift in the burden from one side to another, but no actual relief in the bill itself,” he said. 

McBurney said he was willing to work with other lawmakers to reach a compromise.

“With that, I don’t think I’ll be supporting the bill as it stands today,” he said.

Another public hearing was set for Tuesday morning as the Senate bill was moved to full committee in the House for further discussion.