Iowa’s largest non-profit nursing home chain has asked 37 communities to reclassify its homes from commercial to residential properties, which would cut the chain’s taxes in half and force cities and counties to scramble to make up for lost revenue.
Twenty counties and cities will lose nearly $620,000 next year after approving the changes. Assessors say their hands are tied.
“To me, it’s a commercial property,” said Harrison County Assessor Dennis Alvis, whose western Iowa county will lose nearly $30,000 after the Board of Review changed the status of the Dunlap Nursing & Rehab Center to residential. “But the law, according to how it’s written, there’s a back door. We don’t have the capacity to take this to court.”
Fifteen other communities — including Johnson and Cedar counties — rejected reclassification requests from Care Initiatives. Two counties, Polk and Black Hawk, have not decided.
Care Initiatives has so far appealed 15 rejections to the Iowa Property Assessment Appeal Board, which will hear the cases within the next 18 months. The chain also can file lawsuits in District Court within 20 days of the postmark of the rejection letter.
Care Initiatives, which provides services to more than 3,000 residents in 63 nursing homes and other living units, petitioned 35 Iowa counties and two cities to reclassify nursing homes and related parcels across the state.
These nursing homes, which range in size from 39 to 196 beds, offer services that include 24-hour skilled nursing, meals, physical therapy, dental services, hair salons, activities and Wanderguard protection systems for Alzheimer’s patients, according to the chain’s website.
Care Initiatives manages the Heritage Nursing & Rehab Center at 200 Clive Dr. SW in Cedar Rapids but does not own the 201-bed facility and did not seek reclassification for that unit.
In the petitions, Care Initiatives cites Iowa law allowing non-profit organizations that provide “land and buildings that are used primarily for human habitation” to be classified as residential properties.
“Care Initiatives fits squarely within this statutory provision and so is seeking residential classification,” wrote Deb Tharnish, an attorney for Des Moines law firm DavisBrown in a letter to the Johnson County Board of Review.
Tharnish also cites a 2004 Iowa Court of Appeals ruling that a Red Oak nursing home owned by a non-profit should be considered residential.
Residential — or something else?
Several county assessors and a property law expert dispute that nursing homes are used primarily for human habitation.
“If they rent a room for $5,500 a month, is the main purpose habitation or something else?” said Johnson County Assessor Bill Greazel. “The Board of Review decided it was primarily used for a service. It’s a fine line, but it makes a big difference in their taxes.”
Care Initiatives asked Johnson County’s Board of Review to change the tax status of Lantern Park Nursing & Rehab Center, 2200 Oakdale Rd. in Coralville, and the nursing home’s former site, also in Coralville. The chain is paying $224,500 in taxes this year for both properties. Coralville would have lost more than $116,740 in 2012 if the board had approved the residential designation.
The possible loss in tax revenue would have been a minor blow to Coralville, but in some Iowa communities, the local nursing home is a major taxpayer.
The city of Osceola, which has about 4,800 residents, will subtract $166,500 from next year’s tax rolls after the county reclassified the new 90-bed Southern Hills Specialty Care facility.
Plymouth County, a northeast Iowa county of 25,000, will forfeit about $16,000 next year because of the reclassification of the Kingsley nursing home. Jim Henrich, chairman of the Plymouth County Board of Supervisors, said the loss will mean reshuffling the budget.
“Anytime you have a cut in your income, there’s somewhere else you have to make up for it,” he said.
Several Iowa counties said their decision to reclassify Care Initiatives’ nursing homes as residential was influenced by a May 9 email from the Iowa Department of Revenue. The email said property owned by non-profits and used for human habitation should be classified as residential property.
Dale Hyman, the department’s administrator of property taxes, said his staff sent the email after several county assessors asked for guidance.
“If (Care Initiatives) meets those criteria, it appears to us they would qualify for the exception,” Hyman said, “but it’s not our call to make.”
The department reviewed the issue internally but did not seek advice from the Iowa attorney general before drafting the memo, he said.
This dispute over commercial vs. residential classification occurs as the Iowa Legislature considers proposals to reduce commercial and industrial property taxes.
Not a new court case
If Care Initiatives does take Iowa counties to court, it won’t be the first time.
The chain sued two Iowa counties in the early 1990s, arguing its nursing homes should be exempt from paying property taxes altogether.
In one case, the Iowa Supreme Court upheld a District Court ruling against the tax exemption. “We agree Care does not qualify under our statute as being used for charitable and benevolent objectives,” the court wrote in the May 19, 1993, ruling.
That case, Care Initiatives vs. The Board of Review of Union County, shed light on how Care Initiatives earned non-profit status.
Beverly Enterprises, former owner of 45 Iowa nursing homes, sold the chain to Ventana Investments in 1989 for $57 million. Ventana, run by Texas nursing home developer Bruce Whitehead, used the non-profit corporation that became Care Initiatives to purchase 41 of the nursing homes for $63.5 million, according to the Supreme Court ruling.
Non-profit status questioned
The tax records Care Initiatives submitted with its recent reclassification bids prompted several county assessors to question how a nursing-home chain is considered non-profit when its revenue totaled $146 million in 2009.
“Care Initiatives wouldn’t be buying up all these nursing homes if they weren’t making money,” said Assistant Cass County Assessor Marie Parrott.
Care Initiatives’ expenses for 2009 were nearly $143 million, which included $80.6 million in salaries, according to the chain’s Form 990 tax report.
The chain paid $2.5 million in salaries and related compensation to nine senior-level administrators in 2009. Miles King, the chain’s president and CEO, was paid nearly $615,000 in salary and other compensation. The chain also paid each of five board members $28,200 in 2009 for working three to five hours a week, the tax report shows.
The chain donated $147,000, or about one-10th of 1 percent of its revenue, to charity. Of that, $100,000 supported the Alzheimer’s Association Memory Walk.
Care Initiatives has spent more than $70 million on new buildings across the state that provide more beds and more services, according to a statement from the chain.
Iowa Sen. Chuck Grassley is among leaders who have questioned whether non-profits, such as hospitals, churches and universities, are doing enough for the public to enjoy tax benefits.
Non-profits often put revenue into new building projects or higher salaries, which helps them compete with for-profit organizations, said Richard Koontz, director of the Waterman Iowa Nonprofit Resource Center at the University of Iowa. The Internal Revenue Service monitors excessive compensation for non-profit leaders and can force the officials to give back the money, plus a 25 percent penalty, Koontz said.
“If everyone in your position gets that amount, it’s considered comparable compensation,” he said.
Property tax disputes common
It’s not unusual for a property owner to try to recast their property as a residence to reduce taxes.
Apartment complex owners clashed with Iowa City officials last year after their bid to get the buildings classified as co-ops was denied. This change to residential designation would have cut the owners’ taxes in half, because of the residential rollback.
Nursing homes may be a hybrid of commercial and residential structures, said Jonathan Rosenbloom, a Drake University law professor who specializes in property, as well as state and local government.
“There are some states that say they should be recognized as something different,” Rosenbloom said.
Residential property owners traditionally have been given a tax break because government wants to encourage individual homeownership, Rosenbloom said. If a nursing-home chain owns dozens of homes that serve thousands of people, that may not fit the intent of the residential rollback, he said.
Counties and cities may feel pressure to approve the reclassification because they don’t want to face court action or lose the nursing home to a nearby county, he said.
“Whatever the property tax is, even if it’s reduced, will be more than if (the nursing home) moves to the next county,” Rosenbloom said.
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