To practice real estate law is to work for the orderly ownership, pledging, transfer, development and use of real estate. Much of real estate law developed through common law and state statute, requiring a real estate attorney to be able to critically analyze case law in making decisions on a current transaction. In addition, the ability to write consistent, concise documents is paramount since written documents are at the root of substantially all real estate transactions. The largest trend affecting these skills is the increase in attorneys not licensed in a state undertaking transactions in other jurisdictions, as clients’ business has become more regional, national and international. One common mistake is the preconception that real estate laws do not vary between jurisdictions; in many instances this is not the case. Real Estate law is a very local, state-specific area of law. Expansions of electronic recording and notary laws, while a positive trend overall to efficiently complete transactions, may produce negative side effects if they further limit local professionals’ involvement in a transaction.
The primary areas of impact of the COVID-19 pandemic upon the real estate sector in Iowa relate to landlord-tenant law and moratoria of certain types of evictions. Those impacts will have likely expired by the date of this publication, although future events could see similar temporary responses. Currently, there are no anticipated long-term changes from a legislative perspective resulting directly from the COVID-19 crisis.
During the pandemic, Iowa partially instituted a law permitting remote online notarization in advance of the originally scheduled effective date of July 1, 2020 for the full online notarization law. Presently, it is difficult to ascertain localized impacts of the COVID-19 crisis on the real estate sector as a whole.
The most significant trends in Iowa real estate over the last 12 months have been the continued development of data centers and wind energy. This is attributed to tax credits for both, whether local, state or federal, along with abundant water, abundant wind, inexpensive power and relative safety from natural disasters. Facebook, Microsoft, and MidAmerican Energy have all continued developments in these areas.
See 8.6 Key Changes in Federal Tax Reform.
The most prevalent forms of real estate ownership in Iowa are largely dependent upon whether the property owned is personal residential or commercial. The conveyance of property, whether residential or commercial, creates a tenancy in common unless a clear contrary intent is expressed. In the commercial setting, if property is held by two or more owners, a common business practice is to have a tenants in common agreement (a “TIC Agreement”) which sets forth the rights and responsibilities of the various owners.
One of the exceptions to this general rule is the scenario in which the conveyance recites the grantees are married to each other at the time of the instrument. In such cases, Iowa law presumes the grantees to take title as joint tenants with full rights of survivorship. Iowa law does not recognize tenancy by the entirety.
See 5.1 Types of Entities Available to Investors to Hold Real Estate Assets for a further discussion of entity ownership of real estate.
See 2.1 Ownership Structures.
Iowa is a notice state. Lawful and proper transfer of title to real estate is effectuated in the State of Iowa primarily through execution and recordation of deeds. Pursuant to Iowa’s marketable title statute, additional instruments may serve as muniment of title.
For example, a properly admitted last will and testament of a decedent who was the vested titleholder of real estate may serve as muniment of title. Additionally, a properly drafted divorce decree may serve as muniment of title. Subject to certain exceptions, deeds conveying title to real estate will only be recorded by the local county recorder’s office if accompanied by a declaration of value setting forth the consideration paid for the real estate, together with a groundwater hazard statement setting forth certain known hazards related to the property.
The nature and manner of due diligence performed by buyers of real estate is largely dependent upon the nature of the transaction. In residential transactions, subject to certain exceptions, sellers must provide mandatory disclosures as mandated by Iowa Code. The disclosure statement must be delivered prior to either the transferor making a written offer for the transfer of the real property, or accepting a written offer for the transfer of the real property, and must include information relating to the condition and important characteristics of the property and structures located on the property, including significant defects in the structural integrity of the improvements.
Additionally, as a condition to recording of any conveyance instrument, the deed must be accompanied by a groundwater hazard statement. The groundwater hazard statement must disclose:
Generally, properties which include a private sewage disposal system (ie, a septic system) must be inspected by a certified inspector. A copy of the certified inspector’s report ("time of transfer inspection") must accompany any deed conveying title to property which includes a septic system. The county recorder’s office will not record a deed upon the books which is not accompanied by the required time of transfer inspection.
In the residential context, attorneys may assist or facilitate in obtaining or reviewing the mandatory disclosures or forms that will accompany the title transfer documents. The bulk of any true due diligence is usually carried out, however, by the purchaser and the purchaser's home inspector. The primary exception to this general rule is with regard to examination of title.
Iowa is an abstracting state, wherein an abstract of title is prepared for the property subject to transfer and the attorney makes an examination of the abstract to certify whether the proposed transferor possesses marketable title. Conversely, in the commercial context, the attorney may take a more active role in reviewing due diligence materials other than those affecting title, such as surveys, inspector reports, rent rolls and the like.
The nature and extent of representations and warranties in purchase and sale agreements varies between the residential and commercial context.
In a typical commercial transaction, where there is a due diligence period, the seller will make few, if any, representations and warranties, as the buyer will have had adequate opportunity to inspect the property during the due diligence period. Sellers will, however, represent and warrant those matters which are required to be set forth in any mandatory disclosure.
Thus, for example, sellers will represent and warrant that there are no underground storage tanks on the property, as this particular matter must be disclosed on the groundwater hazard statement which is required to be filed along with the deed transferring title to grange. In the commercial transaction, a buyer’s remedy for breach of any representation will be governed almost exclusively by the sale contract.
In residential transactions, sellers will represent and warrant those matters which must be disclosed, just as noted with commercial transactions. Sellers must also make certain disclosures regarding the existence, or lack thereof, of lead-based paint or lead-based paint hazards. Remedies available to buyers for breach of a representation and warranty are largely common law remedies.
However, the Iowa statute governing mandatory seller disclosures for residential property transfers does provide that a buyer may recover actual damages for failure to comply with the disclosure statute.
While not numerous, there are some important considerations for foreign persons investing in real estate in the state of Iowa. Chief among them is an Iowa statute which generally prohibits nonresident aliens, foreign business, foreign governments, or an agent, trustee or fiduciary thereof from purchasing or otherwise acquiring agricultural land in Iowa. There are several exceptions to this general rule.
For example, an interest in agricultural land, not to exceed 320 acres, acquired for an immediate or pending use other than farming is permitted. Pending the development of the agricultural land for a purpose other than farming, the land shall not be used for farming except under lease to an individual, trust, corporation, partnership or other business entity. Recent changes to CFIUS regulations have not yet had a major impact in Iowa.
Sales agreements continue to include customary representations related to OFAC and FIRPTA.
In general, a buyer of Iowa real estate could face strict liability for certain environmental contamination on the acquired real estate, unless the buyer qualifies for an innocent landowner defense under applicable environmental laws. In all but the routine residential real estate transactions, buyers are advised to obtain what is known as a "Phase I environmental report" to examine whether there are any known environmental risks. The allocation of risk of environmental liabilities as between buyer and seller is the subject of negotiation under the purchase agreement and will typically take the form of the representations and warranties – and corresponding indemnities – that a seller is willing to provide.
As in all jurisdictions, the cities and counties in Iowa restrict the use of real estate through zoning ordinances. Given the differences in designations (and permitted uses within any given designation) across counties and municipalities, the most efficient mechanism for determining the permitted uses of any particular tract of real estate is by requesting a zoning report from the local zoning authority. Developers of real estate may find it advisable to enter into development agreements with the locality (and are quite frequently required to do so).
These development agreements can serve as useful mechanisms to attempt to effectuate a change in zoning designations for particular parcels of property. The change in zoning designation will, however, almost always require the consent of several levels or departments of local government, after notice and public hearing regarding any change in zoning designation.
Condemnation or eminent domain are possible in the state of Iowa through a statutory process. The state identifies properties affected by a particular project, inspects and values the property, and makes an offer to the owner. If the property owner does not accept the state’s offer, there is a quasi-judicial process which unfolds, including determination of "just compensation" by an appointed county commission.
Either party may appeal the determination of the commissioners. The appeal is heard by ordinary judicial process.
Iowa imposes a transfer tax, which is collected at the time the conveyance document is recorded with the county recorder. Transfer tax is incurred at the rate of 80 cents for every USD500 of consideration paid in excess of USD500. Transfer tax is typically paid by the seller.
Aside from transactions in which consideration is less than USD500, there are a host of exceptions, including transfers to newly created business entities or as part of reorganization of business entities. Note that transfer or sale of shares of a company which owns real estate does not trigger the obligation for payment of transfer tax in Iowa.
Conversely, real estate taxes are usually prorated between buyers and sellers as of the date of possession of the property. In Iowa, property taxes are incurred on a fiscal calendar (ending June 30th) and are paid in arrears (with the first half payable September 30th and the second half payable March 31st of the following calendar year). Because of the fiscal year accounting period and payment in arrears, some care is required when it comes to payment and responsibility for payment of real estate taxes between buyers and sellers.
In a typical real estate transaction, the seller will pay the cost of revenue stamps, preparation of the instruments transferring title and the cost to update the abstract for review by the buyer’s attorney. The seller will also generally be responsible for the preparation and recording fees related to any instruments necessary to cure defects in the seller’s title. Buyers will typically pay the cost related to examination of the abstract, the recording fees for the instruments conveying title, and the cost for updating the abstract post-close to reflect the transfer and any mortgage.
See 2.6 Important Areas of Law for Foreign Investors.
Acquisitions of Iowa commercial real estate are typically financed through mortgage financing offered by commercial banks. In the typical process, the lender would first issue a loan commitment letter to the potential buyer/borrower setting forth the amount, interest rate and other main terms of the loan to be made to purchase the real estate, together with the requirements that must be satisfied before the loan will be made. Such requirements would include due diligence matters, the collateral that must be provided to secure repayment of the loan, and business covenants that must be met.
The loan documents to be signed at closing would reflect the requirements set forth in the loan commitment, and would typically include a loan agreement setting forth both the lender’s obligations with respect to disbursements of loan funds as well as the borrower’s current and ongoing requirements with respect to the loan, a promissory note evidencing the debt owed to the lender, and a mortgage encumbering the newly acquired real estate as well as other security documents that might encumber the borrower’s financial accounts, equipment and inventory, or other personal property.
The type of security interest required by a lender financing the acquisition and/or development of Iowa commercial real estate may vary somewhat by transaction, but should in all normal circumstances involve the borrower granting a mortgage against the real estate in favor of the lender to secure repayment of the loan. Iowa law also recognizes that a borrower may give a lender a deed of trust; however, in practice the difference will be merely in the form of the instrument as deeds of trust and mortgages are foreclosed in the same manner under Iowa Code Chapter 654. In addition to the mortgage, some lenders may require a separate assignment of any rents generated from the acquired real estate, though these rights may also be granted within the mortgage instrument itself.
A wide variety of security interests may also be granted against a borrower’s personal property, in the form of a general security agreement which may be supplemented and/or perfected by the filing of UCC financing statements.
While not prevalent in commercial real estate transactions, it is possible that a seller may choose to finance the buyer’s acquisition of the real estate. If so, the seller and buyer would typically enter into a real estate installment contract, providing for a down payment to be made at closing and the balance of the purchase price to be paid to the seller in regular installments with interest.
Purely in terms of the nature of the documentation and the process involved, there would be no special regulatory hurdles or restrictions affecting foreign lenders as compared with domestic lenders in a transaction involving Iowa real estate. However, foreign lenders should consider the facts and circumstances involved in the particular transaction as well as other transactions the lender may be involved in within the State of Iowa in order to evaluate whether the lender may be deemed to be transacting the business of banking in Iowa. If so, then the lender would be subject to the terms of the Iowa Banking Act.
Iowa law does not impose a mortgage tax on the granting or enforcement of a mortgage against real estate. Nominal recording fees on a per page basis are charged in order to file the mortgage in the county recorder’s office. Normally, a transfer tax equal to USD1.60 per USD1,000 of consideration in excess of USD500 is due upon a transfer of real estate.
Such transfer tax is not due upon the issuance of a sheriff’s deed pursuant to a mortgage foreclosure, but must be paid if the foreclosing bank subsequently sells the property after acquiring title through the foreclosure process.
Iowa law does not impose any restrictions on an entity’s ability to give a valid security interest against its real estate assets unless such restrictions are set forth in the entity’s organizational documents (ie, articles of incorporation, bylaws, operating agreement, etc).
A Defaulting Borrower
When a borrower is in default under a mortgage loan, the lender must first review the loan documents to determine if they impose any special requirements or procedures governing their enforcement. Under Iowa Code Section 654.2D, residential borrowers are entitled to a 30-day notice of default and opportunity to cure before a lender may enforce the mortgage for a borrower default under a mortgage against the homestead. If the mortgaged property is agricultural land, the borrower is entitled to a 45-day notice of default and opportunity to cure under Iowa Code Section 654.2A, and, additionally, the lender must ordinarily obtain a farm mediation release under the procedures of Iowa Code Chapter 654A prior to enforcing the default.
While there is no legal requirement to provide a notice of default and opportunity to cure to a borrower under a mortgage encumbering commercial real estate, under Iowa Code Section 654.4B applying to all mortgages, a lender must provide at least a 14-day demand for the accelerated balance due under the mortgage loan prior to commencing a foreclosure action in order to qualify for an award of attorney fees in such action.
Iowa law does not recognize a "power of sale" in a mortgage instrument purporting to grant the lender authority to conduct a private sale of the mortgaged property to satisfy the secured debt. Rather, all mortgages and deeds of trust must be foreclosed judicially under the procedures set forth in Iowa Code Chapter 654 or under statutory non-judicial procedures. In general, the judicial process involves a civil action to establish the validity of the debt and mortgage and the borrower’s default thereunder, and, if successful, will result in a decree of foreclosure issued by a judge that directs the county sheriff to conduct a public auction under statutory procedures to sell the mortgaged property in satisfaction of the debt.
A lender may avoid the judicial procedures of Chapter 654 by pursuing the statutory non-judicial foreclosure procedures provided under Iowa Code Section 654.18 and Iowa Code Chapter 655A, but each alternative procedure requires the assent of the borrower to some degree in order to avoid the need for a judicial action.
Lender Security Interest
A lender perfects its security interest against real estate by recording the mortgage in the county recorder’s office at the time of the loan closing. No further action is required to maintain the priority of the security interest as against other persons acquiring an interest in the real estate so long as the mortgage remains unsatisfied of record. When a foreclosure action is filed in district court, the clerk of court will enter the action in the clerk’s lis pendens index, and any person acquiring an interest in the property subsequent to such entry will be subject to the outcome of the foreclosure action whether or not such person is joined as a party to the action.
In general, the priority of debt secured by a mortgage against real estate is determined based upon the time of recording the mortgage in the county recorder’s office. One exception to this rule occurs for mechanics’ liens under Iowa Code Chapter 572, which secure payment for material or labor furnished for the improvement, alteration or repair of real estate. If such material or labor were first furnished prior to the recording of the mortgage, the claimant may obtain a lien with priority ahead of the mortgage (as of the date the furnishing of material or labor was first commenced) so long as the claimant files its mechanic’s lien within 90 days after completion of the furnishing of material or labor.
A second exception may occur by voluntary agreement between the original mortgagee and the holder of a later-recorded mortgage to subordinate the priority of the first mortgage to the second mortgage.
If the lender has not acted as an owner or operator of the contaminated property prior to becoming the owner by enforcing its mortgage, the lender will not have personal liability for pollution of the real estate by the borrower or previous owners. However, upon foreclosing on the real estate the lender will be faced with a problem in that the contaminated real estate may be difficult if not impossible to sell, except at a substantially reduced value.
The insolvency of a borrower will not of itself affect the validity or priority of a lender’s recorded mortgage lien under Iowa state law, unless the mortgage itself was created as part of a fraudulent conveyance. In the event that a borrower files for protection under federal bankruptcy laws, whether before or during an event of default under the mortgage, the lender should appear in and protect its interests in the bankruptcy proceedings. In general, the filing of a bankruptcy petition will effect an automatic stay of any proceedings to enforce a mortgage or other security interest while the bankruptcy action is pending.
However, a lender may often successfully request a lifting of the stay with respect to a recorded mortgage, and once this is granted the lender may proceed to foreclose its mortgage during the pendency of the bankruptcy proceedings.
The design, appearance and method of construction of new buildings or refurbishment of existing buildings are controlled by multiple layers of governmental regulations under Iowa law. The applicability and nature of such regulation may vary by municipality and county, but may include state and local building codes, zoning ordinances, subdivision ordinances and site plan ordinances. Building codes address construction requirements designed to address safety concerns. Zoning law involves the division of land within a city or county into districts and regulates uses and developments according to district.
Subdivision ordinances govern the landowner’s ability to divide a larger parcel of land into one or more smaller parcels, with the goal of promoting orderly development of the land as a whole. Site plan ordinances generally work to ensure that the details of the development of a parcel comply with all applicable laws and promote orderly development at the parcel level.
Local governments, meaning municipal government and county government, are responsible for regulating the development and designated use of individual parcels of real estate in Iowa. Local governments must comply with any applicable state law in implementing these controls, but otherwise have general "home rule" authority to exercise control over local matters. For example, Iowa Code Chapter 414 authorizes municipalities to enact local zoning ordinances. Such local ordinances must comply with the general rules set forth in Chapter 414, but individual ordinances may vary in precisely how the statutory authority is exercised.
The process for obtaining zoning entitlements to develop a new project or complete a major refurbishment of an improvement on Iowa land may vary to some extent based upon local ordinance. In general, zoning laws divide a city or county into districts setting forth "permitted uses" within each district. If the proposed project is a permitted use, then the developer need not take any further action under the zoning laws, but nevertheless must obtain approval under the site plan ordinance as to the development of the proposed permitted use as well as obtaining all applicable building permits.
If the proposed project is not a permitted use, then the developer must pursue either a rezoning, an exception or conditional/special-use permit, or a variance.
A parcel of land may be rezoned either by the decision of the local governing body (ie, the city council or the county board of supervisors) on its own accord or upon a petition for rezoning from the landowner. In either case, a rezoning may only be adopted after a public hearing on the proposal with proper notice as required by law. Parties in interest and the general public are entitled to be heard at the public hearing.
Further, landowners or neighboring landowners are entitled to file written protest of a proposed rezoning prior to the hearing, and if a statutory threshold of opposition is met a super-majority vote of the local governing body will be required to approve the rezoning. If agreed to by the landowner, the local governing body may impose conditions upon the approval of the rezoning.
Conditional Land Use
Certain uses of land may not be allowed as a permitted use by a landowner as a matter of right but may be allowed conditionally upon satisfaction of certain standards. Such uses are variously called "special exceptions", "special uses" or "conditional uses" depending upon the local ordinance. To qualify for such a use, the landowner must file a petition with the zoning board of adjustment.
The decision to grant or deny such a request is made following a public hearing before the zoning board of adjustment.
A proposed use of land that is otherwise prohibited by a local zoning ordinance may nevertheless be permitted upon the granting of a "variance". A variance may only be granted upon a showing by the landowner of "unnecessary hardship", meaning:
The decision to grant or deny a request for variance is made by petition to the zoning board of adjustment and a public hearing before such board.
The process to appeal an adverse decision in a zoning matter depends upon the nature of the decision being appealed. An appeal of an enforcement of a zoning ordinance is first made to the zoning board of adjustment. If the petitioner is not satisfied with the determination of the zoning board of adjustment, the decision may then be further appealed for judicial review in state district court.
Similarly, a landowner who disagrees with a zoning board of adjustment’s decision on a request for a special exception or variance may appeal to the district court for judicial review. A petition for judicial review must be filed within 30 days of the decision by the zoning board of adjustment. A zoning decision made by a city council or county board of supervisors may also be challenged by judicial review in the district court.
Typically, such actions must be challenged within 30 days of the decision by a petition for certiorari similar to judicial review of actions by the zoning board of adjustment. However, defects in the process or action taken by the local governing body that are deemed "jurisdictional" may generally be challenged at any time by a declaratory judgment action.
While it is not generally required to enter into agreements with local authorities or utility suppliers to facilitate a development project in Iowa, for larger-scale commercial developments it is a common practice. For such larger-scale projects, it is common for a developer to engage in pre-application meetings with local government planning, zoning and economic development staff to discuss the proposed development in light of building, zoning, subdivision and site plan approvals, as well as potential economic development incentives that may be available, such as tax increment financing or tax abatement programs. The developer and the local governing body will often enter into a development agreement requiring the developer to commit to threshold value improvements on the property or construction of public infrastructure improvements in exchange for or contingent upon desired zoning, subdivision and site plan approvals or receipt of economic incentive packages.
Local governments are able to enforce development and use restrictions under their general zoning and other police powers. In addition, when developers have entered into development agreements, restrictive covenants or other voluntary agreements with the local governing body or with neighboring landowners, such agreements are binding on future owners or other interest holders when recorded and generally enforceable under property and contract law.
The following entities may be formed under Iowa law by investors and all are empowered to own and operate real estate assets: general partnerships (GPs), limited partnership (LPs), limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), limited liability companies (LLCs) and business corporations. Limited liability companies are the most common vehicle to hold real estate investments in Iowa, given the combination of tax benefits and the flexibility available under the statute in designing the investment/ownership and management structures of the entity. Entities formed under the laws of a state other than Iowa may own real estate assets in Iowa, but investors should take care to evaluate requirements to obtain a certificate of authority to do business in Iowa for the foreign entity depending on the nature of activities being undertaken.
Investors seeking to acquire agricultural land in Iowa must be mindful of the restrictions of Iowa Code Chapter 9H applicable to ownership of such land by entities. This chapter restricts the authority of most entity forms to own and operate Iowa agricultural land, subject to prescribed exceptions for family entities, small entities and acquisitions of land for non-agricultural purposes. The details of Chapter 9H must be evaluated on a case by case basis whenever an entity seeks to acquire an interest in Iowa agricultural land.
In addition, the similar restrictions of Iowa Code Chapter 9I must be evaluated where a non-resident alien seeks to acquire an interest in an entity owning Iowa agricultural land.
The main features of the constitution and governance of entities created under Iowa law are similar to what will be found in other states.
A general partnership is an exception to the general rule that a filing with the Iowa Secretary of State is required to create the legal existence of the entity. Rather, a general partnership is created by the association of two or more persons to carry on, as co-owners, a business for profit. The details of the partners’ rights to manage the partnership and share in its profits and losses are governed by a written or unwritten partnership agreement and Iowa Code Chapter 486A.
The main drawbacks of a general partnership structure are less flexibility in structuring the relations among partners and no limitation of liability – that is, all partners are jointly and severally liable for obligations of the partnership.
A limited partnership is formed by filing a certificate of limited partnership with the Iowa Secretary of State. The details of the partners’ rights to manage the partnership and share in its profits and losses are governed by a written or unwritten partnership agreement and Iowa Code Chapter 488. The difference between a general and a limited partnership is that the latter includes two classes of partners – one or more general partners who have the sole authority to manage the operations of the partnership, except for major actions that require the approval of the limited partners, and limited partners who have rights to share in profits and losses but limited voting rights.
In a limited partnership, general partners are jointly and severally liable for obligations of the partnership, while limited partners have no liability solely by virtue of their status as limited partners. A common practice in a limited partnership is to have a corporation or limited liability company act as the general partner to achieve limited liability for its owners.
Limited Liability Partnerships and Limited Liability Limited Partnerships
A limited liability partnership operates for all intents and purposes as a general partnership, except that, by filing a statement of qualification with the Iowa Secretary of State electing to become a limited liability partnership, the general partners are relieved of joint and several liability for obligations of the partnership solely by virtue of their status as partners. Similarly, when a limited partnership adopts a certificate of limited partnership stating that the limited partnership is a limited liability limited partnership, its general partners are relieved of joint and several liability for obligations of the partnership solely by virtue of their status as partners, and the partnership for all intents and purposes operates in the same manner as a limited partnership.
Limited Liability Companies
A limited liability company is formed by filing a certificate of organization with the Iowa Secretary of State. The details of management of the company and distribution of its profits and losses are governed by a written or unwritten operating agreement and Iowa Code Chapter 489. The equity owners of a limited liability company are called members.
The persons with general authority to operate the day-to-day affairs of the limited liability company may be the members or may be managers appointed in accordance with the company’s operating agreement. Chapter 489 affords broad flexibility in structuring the internal operations of a limited liability company. Neither members nor managers are personally liable for obligations of a limited liability company solely by virtue of their status as members or managers.
A business corporation is formed by filing articles of incorporation with the Iowa Secretary of State. The details of management of the company and distribution of its profits are governed by duly adopted bylaws and Iowa Code Chapter 490. The equity owners of a business corporation are called shareholders.
The business and affairs of the corporation are governed by a board of directors elected in accordance with the company’s articles of incorporation and bylaws and Chapter 490, and the board of directors may elect officers to carry out the directions of the board of directors. Neither shareholders, directors nor officers of the corporation are personally liable for obligations of a corporation solely by virtue of their status as shareholders, directors or officers.
Broadly speaking, partnerships and limited liability companies are the preferred vehicles for investment in Iowa real estate from a tax perspective. This is due to the fact that these are considered "pass-through" entities, meaning there is no separate income tax on profits earned at the entity level, but instead there is only income tax to the individual equity owners based on the entity’s profits. In contrast, a corporation must pay a corporate income tax on its profits, and when dividends from those profits are issued to its shareholders those dividends will be taxable income to the individual shareholders.
See 5.2 Main Features of the Constitution of Each Type of Entity.
Generally, the only method by which another can occupy real estate without purchasing the property is through a lease. However, a license agreement or easement agreement will allow a party to use property without entitling the party to exclusive occupancy or possession.
The two primary methods of commercial lease are differentiated by the method of rental payments.
Under a "net lease" arrangement the tenant will pay base monthly rent, as well as the tenant’s share of operating expenses as additional rent. The operating expenses included in additional rent typically include items such as the tenant’s share of property taxes, insurance and expenses related to the maintenance and repair of the common areas on the property. The usual net lease will also include a true-up provision to account for any unforeseen variance in the operating expenses which occur over the course of the lease year.
In contrast, a "gross lease" arrangement obligates a tenant to pay only monthly base rent without the additional rent. In a gross lease the landlord accounts for all expenses as part of the monthly base rent, which requires the landlord to have a firm grasp on anticipated operating expenses of the property if the landlord wishes to enter into a multi-year lease with the tenant.
Though not used as frequently, a third type of commercial lease is a ground lease, wherein a lessee lets real estate from a lessor for the purpose of constructing improvements upon the leased ground. Lease arrangements vary as to who will be deemed the owner of the improvements at the expiration of the ground lease.
In Iowa, rent and lease terms are governed by three separate and distinct chapters of the Iowa Code depending upon the property being let:
While Chapter 562 governs commercial leases, such leases are still primarily governed by the lease and common law. Chapter 562 does mandate certain terms be included in a lease (eg, agricultural leases must commence on March 1st and must be terminated by written in notice by September 1st of the year preceding the termination). In contrast, both Chapter 562A and Chapter 562B have a significant number of lease terms which are deemed to be a part of every lease, whether expressly set forth in the lease or otherwise. Additionally, both chapters include very precise procedures for defaults, notices to be delivered upon default, and the manner and method of evictions.
While it is difficult to say that there are "typical terms" in a commercial lease, there are some commonalities with regard to certain terms such as length of the lease, maintenance obligations and frequency of rent payments. Frequently, a commercial lease will have an initial term of five to ten years, with an option or series of options for renewal periods (such options most commonly being granted to the tenant).
When it comes to maintenance and repairs, the landlord will generally be responsible only for those matters which affect the structural integrity of the building, such as roof, foundation and exterior of the building. Virtually all other expenses will be borne by the tenant directly or indirectly as part of the operating expenses in a net lease. For example, the cost for maintaining the parking lot will initially be borne by the landlord, but will be recouped through the tenant’s payment of its pro rata share of operating expenses.
Finally, most leases require the tenant to pay monthly rent. As noted above, in the situation of a net lease, the tenant is also required to pay its pro rata share of operating expenses of the building. The landlord will generally provide the tenant with a yearly budget of anticipated operating expenses for the year and tenant will pay 1/12 of tenant’s pro rata share each month. Any necessary adjustment upward or downward at the end of the year to account for actual operating expenses is accomplished through a true-up.
It is a common occurrence for the monthly rent, even the monthly base rent, to vary over time. Especially for leases with longer terms, landlords and tenants will build in variations of rent over time. Most often, the variances are effectuated through rental escalators where the rent increases by a set percentage for each renewal term.
In certain circumstances, the rent may be based upon retail sales (if applicable) with rent varying based, at least in part, upon retail sales. In some agricultural leases the rental escalators which are built in are derived through an annual cash rent survey which is compiled and published by Iowa State University.
See 6.5 Rent Variation.
No taxes or governmental levy is payable on rent in Iowa, beyond state and federal income taxes.
Generally, a tenant may be required to make payments to the landlord at the commencement of the lease in addition to the first month’s rent. For example, in almost every case the tenant will be required to pay a security deposit, which the landlord will hold in trust pending the tenant’s fulfilment of its obligations under the lease. Further, a tenant may be required to contribute some amount to capital improvements, although this practice varies greatly from lease to lease.
In some cases, any capital improvements to the leased premises must be contracted for, carried by, and paid for by the tenant. In other cases, the landlord will undertake all capital improvements and figure the cost of such improvements as part of the rental to be charged. In certain other circumstances, the landlord may provide a build-out allowance, with any additional improvements to be paid for by the tenant.
See 6.4 Typical Terms of a Lease.
As with charges for maintenance and repairs to common areas of the rental property, charges for services, utilities and telecommunications are most frequently paid indirectly by the tenant through the additional rent payments made as part of operating expenses. However, any services which are provided directly to the tenant, or which are capable of being separately metered (eg, water or electricity) will most often be paid directly by the tenant to the service provider. For those services which are not separately metered or not capable of segregation, the costs are generally paid through the operating expenses owed by each tenant.
As part of the operating expenses, the landlord will usually carry extended coverage insurance against loss, damage or destruction by fire or other casualty, which will insure the building, most often for an amount not less than the full insurable value on a replacement cost basis. The tenant will ordinarily be required to carry casualty and liability insurance in given amounts depending upon the tenancy, protecting the landlord against such things as harm to person or property. The tenant may also be required to insure the tenant's personal property upon the leased premises.
A landlord is entitled to restrict the tenant to particular types of use of the property. For example, the landlord may restrict the tenant to only operating a retail business out of the rented space or may prohibit the tenant from operating certain types of businesses. In almost every lease, the landlord will expressly prohibit the tenant from carrying on any business practice which is a violation of any federal, state or local law, including criminal laws.
In most commercial leases, a landlord will restrict the manner or type of alterations to the real estate. Frequently, the landlord will define a category of "major alterations", usually delineated by the cost of the improvements, which can be completed only upon prior written consent of the landlord. For all other alterations, consent is not required.
However, in any event the landlord will require that the premises be returned to the same state it was in at the commencement of the tenancy, ordinary wear and tear excepted. The landlord may also set forth that any tenant improvements become the property of the landlord at the expiration of the lease upon the landlord’s election.
See 6.3 Regulation of Rents or Lease Terms.
In almost all commercial leases, one of the events of default under the lease terms will be the tenant’s insolvency, bankruptcy or the like. Thus, if the tenant is deemed to be insolvent under the terms of the lease, the landlord would be entitled to pursue its default remedies under the lease.
The primary form of security which will be required of a landlord to secure a tenant’s performance of its lease obligations is a security deposit. In the commercial lease context, there are few restrictions when it comes to requiring and retaining a security deposit. In the residential context, however, landlords are limited in how much they can require for a security deposit.
Further, in the residential setting use and retention of the security deposit is governed by statute. The statutory provisions are the subject of a fairly large body of case law, which has grown significantly within the last decade.
A tenant’s right to occupy the premises rented ceases upon expiration of the lease term.
A tenant who holds over after the expiration of the lease term can be evicted by summary proceedings. As a general rule, the commercial lease should provide for the scenario in which the tenant holds over with the permission of the landlord since the statute in question does not directly provide for this situation. Thus, for example, it is advisable to include lease language which creates a month-to-month tenancy.
In the context of the agricultural lease, a tenant who holds over and who has not been provided a notice of termination is entitled to remain in possession of the property for an additional year upon the same terms and conditions as the original lease. In the residential setting, a tenant who holds over with permission of the landlord has created a month-to-month tenancy.
Commonly, the events of default which trigger the landlord’s right to terminate the lease will be numerous. Essentially, the failure of the tenant to comply with any obligation under the lease may give rise to termination. Importantly, however, the type of default will likely determine how the landlord is required to proceed.
In a residential lease, the statute dictates what notices must be provided, how they must be provided, when they must be provided, and how long the tenant has to cure a breach. Even in the commercial lease setting, there will most likely be different cure periods depending upon the breach. For example, it is fairly common for a default in the payment of rent to contain a ten-day cure period, while the breach of any other obligation will afford the tenant 30 days to cure the default.
Tenants in any type of lease may be forcefully evicted if they default in the performance of their lease obligations. For commercial leases, the procedure, types of notices and timing are governed almost exclusively by the lease terms. In the residential lease context, there is a very precise set of notices, with specific language, and for which care must be given to the timing and method of service.
In either the commercial or residential lease context, the procedure will involve a notice served or sent to the tenant apprising them of the breach and providing a set period during which the tenant may cure the breach. If the breach is not cured, the landlord may file a civil action for eviction under an Iowa statute which provides for expedited proceedings for evictions. In an ordinary eviction of a residential lessee for nonpayment of rent, the tenant may be evicted from the property in as little as two weeks.
It is important to note that a landlord may be divested of its right to avail itself of these expedited proceedings, if it fails to act within 30 days of the date the cause of action accrued. The exact steps which must be taken in either a commercial lease or a residential lease are beyond the scope of this document, and practitioners must make diligent inquiry as to the various statutes at issue.
Generally, a lease may be terminated by a third party (ie, a person not party to the lease) only in circumstances involving condemnation or eminent domain. In Iowa, the compensation due to a landlord or tenant is determined based upon their respective property interests. Damages for condemnation of a leasehold interest are generally measured by the value of the remainder of the lease term in excess of the rent to be paid. Unlike valuation of an interest in fee simple, lost business profits may be taken into consideration in determining the value of a leasehold interest.
There are myriad types of construction contracts used in Iowa. However, the most prevalent types of construction agreement in the residential construction context are generally the cost-plus agreement, with or without a guaranteed maximum price, time and materials agreement, and stipulated sum agreement (as well as combinations thereof).
The most common project delivery methods are as follows.
The owner contracts separately with a design professional, who handles all design responsibilities, and a general contractor, who handles all construction responsibilities.
The owner hires a single entity, termed the design-builder, to perform both design and construction responsibilities under a single contract with the owner.
Construction Management Methods
The owner separately contracts with a design professional to develop the design of the project and with a construction manager.
The Construction Manager as Advisor (CMa) method
The construction manager contracts with an owner to act as its consultant/advisor in the pre-construction/design phases and to provide construction management services during the construction phrases. Under this method, the owner holds the subcontracts and assumes the risk of delivery of the project regarding cost and schedule.
The Construction Manager at risk (CMAR) method
The construction manager contracts with an owner to act as its consultant in the pre-construction/design phases, to generally provide for the actual construction of the project ordinarily through use of a general contractor, and to otherwise perform construction management services. Importantly, under this method, the construction manager guarantees the cost of the work such that the construction manager assumes the risk with the owner of exceeding such cost. The cost of the work is generally cost-plus with a guaranteed maximum price, but can also be a stipulated sum price.
The primary method for management and allocation of risk as between contractor and owner is through warranties and indemnifications provided in the construction agreement. Contractors will often provide express limited warranties (usually of one to two years in length) and some may otherwise attempt to have the owner waive all other warranties, implied or express. Contractors will often additionally affirmatively disclaim any knowledge of certain aspects of the construction (eg, soil composition on the construction site).
However, Iowa courts have long held that all construction contracts are subject to an implied warranty of workmanlike construction. In certain circumstances, a construction contract may also be subject to the implied warranty for a particular purpose.
Timing and deadlines are important aspects of construction agreements, with contractors generally attempting to remove any firm deadlines from the construction agreement, and owners generally attempting to include more firm deadlines along with a per-diem liquidated damages amount to be imposed for a contractor not meeting the deadlines. An important caveat is that certain contractors will include milestone billing in their agreements. To the extent the contract includes deadlines, however, damages will generally be recoverable by owners and contractors in the event of delay unless the contract includes a provision for no damages upon delay. Additionally, there are numerous exceptions to enforcement of delay damages.
There are numerous additional forms of security which an owner may require to guarantee a contractor’s performance. Generally, these additional forms of security are not negotiated in residential construction agreements. However, in larger commercial transactions, and in construction agreements involving state, county, or municipalities as the owner, owners generally require the contractors to obtain payment and performance bonds, and at times, maintenance bonds.
In some real estate development settings, the more prevalent method is through a requirement that the developer provide a letter of credit from a financial institution for the amount of the improvements.
For non-public projects, Iowa has a mechanics’ lien statute which permits a lien in favor of a contractor or subcontractor who furnishes any material or labor for the improvement, alteration or repair of any building and/or land. Generally, a properly perfected mechanic’s lien is superior to all other liens upon the building or land, except those liens recorded prior to the original commencement of contractor’s work. However, liens resulting from construction mortgages are superior to all mechanics’ liens of claimants who commenced their particular work or improvement subsequent to the date of the recording of the construction mortgage lien.
For public projects, subcontractors have the right to file claims against the retainage held by the public entity under Iowa Code Chapter 573, as well as claims against the payment bond.
Iowa law requires that a certificate of occupancy be issued prior to construction being used or inhabited. The state statute delegates issuance of certificates of occupancy to the particular governmental subdivisions within the state. The certificate of occupancy must, at a minimum, state that the building complies with the Iowa state building code.
Apart from the federal and state income taxes imposed upon the sale of Iowa real estate, the only other tax payable in Iowa upon transfer of title is the transfer tax imposed by Iowa Code Section 428A.1. The amount of transfer tax due is equal to 80 cents for each USD500 of actual consideration paid (or fractional part thereof) in excess of USD500. The consideration paid for the transfer is reported on a declaration of value form, which form must be presented to the county recorder together with the transfer tax due at the time of recording the transfer deed, unless the conveyance qualifies for an exemption from transfer tax.
The transfer tax due upon conveyance of Iowa real estate is only payable upon consideration given for real property. Accordingly, two methods to reduce or avoid the payment of transfer tax are:
No municipal taxes are paid on the occupation of business premises or payment of rent in Iowa.
Iowa does not impose any specific income tax withholding for foreign investors at the state level, although as in all states, withholding for federal income tax is often required. At the federal level, the sale of real property in Iowa is generally subject to withholding at a rate of 15% and foreign investors must file a federal tax return to recoup this amount where no tax is ultimately due.
Real estate investors benefit greatly from utilizing depreciation deductions from their federal and state tax returns. While this creates additional gain on the eventual sale of the real estate, tax benefits such as 1031 exchanges or investment in qualified opportunity funds can defer the recognition of that gain for long periods of time. Additionally, financing costs are generally amortized over the life of the loan and many operational costs can be deducted currently, further reducing an investor’s taxable income.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 ushered in a number of tax changes favorable to commercial real estate growth that continue to affect commercial real estate investment in Iowa.
The Act reduced the top individual tax rate from 39.6% to 37% and expanded the lower tax brackets. Since the real estate industry operates primarily on a pass-through basis, real estate investors should continue to benefit from this rate reduction. Additionally, individuals, estates and trusts that have "qualified business income" (QBI), including QBI from pass-through entities engaged in the business of real estate, may be eligible for a deduction of up to 20% of their QBI.
As part of the Tax Cuts and Jobs Act, a new limitation on the deductibility of business interest was put into effect, but real estate businesses were allowed to make an irrevocable election out of those new limits. The price of making that election was longer recovery periods for real property and improvements. As part of the CARES Act, Congress lessened the Jobs Act limitations for 2019 and 2020 and the IRS subsequently issued a revenue procedure to allow real estate businesses to go back and change this election to take advantage of the relaxed limits.
Qualified Opportunity Funds
An additional boon to real estate investment comes in the form of the opportunity to invest in "qualified opportunity funds". A qualified opportunity fund is an investment vehicle designed to invest in certain low-income census tracts designated at the state level as an "opportunity zone". Investors in qualified opportunity funds can reinvest funds that would otherwise represent capital gains and receive a deferral of that gain until as late as December 31, 2026.
This represents a deferral of capital gains tax of up to six years if the investment is made prior to the close of 2020, and constitutes a significant tax saving for investors.