WATERLOO -- The city's aggressive effort to seize and destroy blighted, abandoned buildings has withstood a challenge from tax sale investors.

The Iowa Supreme Court, in a May 23 ruling, upheld the city of Waterloo's use of a state law which allows local governments to take title to abandoned properties free and clear of any liens or other encumbrances.

Two investment banks, which held tax sale certificates on the property taken by the city, had appealed to the state's top court, claiming the law should not apply to tax liens and that the law was unconstitutional because it deprived those certificate holders of due process.

"If the city cannot obtain clear title, a city would have little incentive to take title to the property," justices said in the unanimous ruling.

"Once a city takes possession of the property, it must expend time and money to make the property safe," the ruling states. "If the city had to pay the tax lien, there would be less money for the city to recoup its costs when it eventually transferred the property for development."

The case involves a state law -- Section 657A, adopted by the Legislature in 2004 -- which was designed to make it easier for local communities to address vacant nuisance properties. Essentially, if the city can prove the home is abandoned and a nuisance, the court can give the city title with no outstanding liens.

HLS US Bank and BIV US Bank had brought the action after the city of Waterloo used 657A to take title to homes on with the banks' investors held tax liens. Those homes, including one at 210 Park Road, have been torn down.

The city of Waterloo is one of only a few jurisdictions exercising the law.

"We're sort of leading the way in the state," said Assistant City Attorney David Zellhoefer, who argued the city's case before the Supreme Court. "A lot of cities were looking at this case to see how it turned out.

"I empathize with the tax certificate holders; this is a real blow to them," he added. "But if they'd take 30 seconds to look at the properties they're buying, they might avoid this problem."

Still, Zellhoefer said the Supreme Court ruling leaves a key question -- whether the law is constitutional -- undecided.

Justices ruled only that 657A was designed to include wiping away tax liens and that the law applied to tax liens applied before the law took effect in 2004. The court did not tackle the constitutional question because attorneys for the banks failed to cite any authority for the claim in their original district court claim.

"It would have been nice to have it all wrapped up in one basket," Zellhoefer said, noting a new challenge may be filed in the future on constitutional questions.

In oral arguments before the Supreme Court, attorney Deana Walocha, representing the tax certificate holders, said the law deprived her clients of due process because they simply held tax liens on the buildings.

"The tax certificate holder can't do anything to clean up the property because they don't have an ownership interest (in the property)," Walocha said. "This would have a chilling effect on the whole tax certificate industry - (which) brings in millions of dollars to the state of Iowa every year."

Local governments to purchases tax certificates at tax sales each June so they get revenue when property owners fail to pay property taxes. Those investors hope to earn healthy interest returns when the property owners eventually pay the back taxes. The threat of losing the entire investment by a 657A action could discourage investors from buying the certificates.

Contact Tim Jamison at (319) 291-1577 or tim.jamison@wcfcourier.com.