A new incentive slipped into last year’s federal tax law has officials in Cedar Rapids, Coralville and Iowa City hoping it will help them continue the revitalization of core neighborhoods.
The federal program would designate low-income neighborhoods across the country as Opportunity Zones, making investors in those areas eligible for a break on capital gains taxes.
On Friday, Iowa Gov. Kim Reynolds nominated seven Census tracts in Cedar Rapids, Coralville and Iowa City for the program, sending her selections to the U.S. Treasury Department. The tracts include focus areas of development for the cities, such as downtown and the New Bohemia district in Cedar Rapids, in between Interstate 80 and Highway 6 in Coralville, and Iowa City Marketplace.
“The Opportunity Zone money, if it works as people hope it will, it’ll provide us with a pretty significant opportunity to finance new investment in these qualified Census tracts, which includes NewBo, Czech Village, downtown, Wellington Heights and, for the most part, much of the core of our city,” Cedar Rapids City Council member Dale Todd said.
How effective or important an Opportunity Zone will be has yet to be determined. The Treasury Department will have to approve Reynolds’ nominations.
City officials still said the program at least would be another way to construct new buildings or reinvest in neighborhoods that need assistance.
“We have a couple of Census tracts that we would like to have as many economic development tools as we can to encourage investment and this would be another tool in the toolbox to do that,” said Simon Andrew, Iowa City’s assistant to the city manager.
‘ANOTHER TOOL IN THE TOOLBOX’
Iowa City hopes the program can help it contend with layoffs by major employers, such as a Procter & Gamble.
“With closures of major retailers including Kmart and Von Maur (which relocated to Coralville), layoffs at Procter & Gamble, Schenker Logistics, ACT, International Automotive Components, Pearson, MetaCommunications, and ripple effects expected through supply chain and logistics companies ... this program could help stabilize and grow the economy in this important sector of our economy,” Iowa City wrote in its Opportunity Zones application.
Procter & Gamble’s main Iowa City plant is in a nominated low-income area that also includes Sycamore Mall-turned-Iowa City Marketplace.
“We expect some opportunity for repurposing facilities or reinvesting in facilities that make that an attractive area. ... Adding this tool to those resources we have committed locally can go a long way to making sure it remains an economically vibrant area,” Andrew said.
‘PUSH THEM OVER THE EDGE’
Coralville has it eyes on a 17-acre plot of land in between Clear Creek and First Avenue, just south of Highway 6. It has businesses on it, but was flooded in 2008 and also has contamination from a nearby auto salvage yard, according to Coralville’s application.
Coralville City Administrator Kelly Hayworth said a number of properties there “are not at their fullest and best use.”
“We think there’s a huge amount of potential there. We have had developers interested in the past, but they couldn’t get over that hurdle of the cost part of it,” Hayworth said.
“Our hope is that maybe this is that piece that will push them over the edge and encourage them to do a project.”
Iowa River Landing is included in the same zone, but Hayworth said that development was not a main reason for the city to apply. Still, he pointed to Iowa River Landing as an example of a project kick-started by government incentives.
“Iowa River Landing is a prime example of how this program may help and spur another part of our community that needs that extra boost,” Hayworth said.
Reynolds nominated zones that include Iowa River Landing, the 17-acre site, Coral Ridge Mall and other developments along Highway 6 in Coralville.
‘SOMETHING TO SUPPLEMENT’
Cedar Rapids applied for neighborhoods that fit with the city’s long-term development plans, city officials said. Reynolds nominated three tracts that include downtown, the MedQuarter, NewBo and Kingston Village.
“We were pretty intentional in how we put those forward based on the realities of where money in the near-term is going to be spent.” Cedar Rapids Economic Development Manager Jasmine Almoayed said.
An Opportunity Zone could help Cedar Rapids continue the recovery it has seen since the 2008 flood, the city said in its application.
“The city desires to continue the momentum of these efforts and feels designation of the Opportunity Zones will assist in doing so,” City Manager Jeff Pomeranz wrote in a letter to the Iowa Economic Development Authority.
Economic Development Analyst Caleb Mason said it’s difficult to estimate the potential effect of an Opportunity Zone, given the unknowns about the program.
“I don’t think it’s on a lot of people’s radars, the people who are going to be using it,” he said. “Once we figure out how it’s going to work, we’ll better understand how to market it and then who are the targets for it.
“It’s not going to be the main tool in the toolbox, likely, but something to supplement” local efforts.
‘CAUGHT US ALL BY SURPRISE’
The Opportunity Zones program has received limited attention, even as some have said it could be one of the most significant development initiatives in the country.
Researchers for the Urban Institute, a Washington, D.C.-based economic policy think tank, described it last month as “a little-publicized incentive” that “could become America’s largest economic development program.”
“It has the potential to be the nation’s largest economic development program, but potential is the key term there.,” Brady Meixell, research assistant with the Urban Institute’s Metropolitan Housing Community Center, said in an interview.
States faced a short turnaround to get their nominations to the federal government. President Donald Trump signed the Tax Cuts and Jobs Act right before Christmas 2017, and states had until March 21 to send in nominations for their low-income Census tracts.
They could get an extension until April 21 to submit nominations, which Iowa took advantage of.
Debi Durham, director of the Iowa Economic Development Authority, said the program “kind of caught us all by surprise.”
“Literally, we found this out at the first of the year. It wasn’t like we had a lot of time to plan for it, right? And we don’t fully understand what the price is, but we know if we don’t get our zones certified, we lose out completely for the next 10 years, so we’re going to play,” Durham said during a recent Gazette editorial board meeting.
Communities with eligible Census tracts had until March 19 to apply to Durham’s agency. The applications asked communities to rank the Census tracts for which they wanted to apply, describe their community vision and discuss how they would use an Opportunity Zone designation to “spur entrepreneurial activity and economic growth.”
Fifty-five Iowa communities submitted applications for 108 low-income Census tracts, according to the authority. The state could nominate only 62 tracts, so a seven-member panel was convened to whittle down the choices.
The panel included representatives from the Iowa Area Development Group, Iowa Farm Bureau Federation, Iowa League of Cities, Iowa Business Council, Iowa Bankers Insurance and Services, Iowa Workforce Development and the Economic Development Authority.
Questions also remain about how the program will work as the U.S. Treasury Department has yet to finalize the rules behind it.
For example, Coralville’s Hayworth said he was not sure if projects already under construction in eligible zones would qualify for the tax break, or just new ones.
“That’s where I’m not quite clear,” he said. “But at any rate, I think the capital gains tax (break) is enough to really get the attention of private developers because that’s a significant amount of money that they pay or they jump through a significant amount of hoops to make sure that they don’t pay them.”
It’s also not clear whether Opportunity Zones selections will be more of a benefit to already up-and-coming neighborhoods — those seeing lots of new development — or low-income areas that drastically need some of those development dollars.
The program’s incentive seems geared to maximize savings for people already investing in neighborhoods seeing lots of development, Adam Looney, a senior fellow in economic studies at Brookings, wrote in February.
“With few guardrails that might promote so-called ‘smart gentrification’ — policies to retain local residents and preserve or expand low- and middle-income housing — it is uncertain whether poor residents will benefit or be kicked out,” Looney wrote.
HOW IT WORKS
At its most basic, the Opportunity Zones program would reward those who invest in low-income areas by giving them a break on capital gains taxes. Investors would have to take money made from selling outside investments and put that money into an opportunity fund.
Those funds specifically would hold assets in qualified, low-income zones. The longer someone holds on to an investment in those funds, the larger the tax benefit they would see, according to the Economic Innovation Group.
To earn a 100 percent exclusion of capital gains taxes, an individual would have to stick with the investment for at least 10 years.
Low-income neighborhoods are defined as Census tracts that have a poverty rate of 20 percent or more, or median family income that is less than 80 percent of the local area’s median income.
“What the idea behind it was trying to do is target communities that are low-income, high-poverty and lack access to capital,” said Brady Meixell, research assistant with the Urban Institute’s Metropolitan Housing Community Center.
The type of projects eligible for the incentive is vast, and possibilities include everything from funding start-ups to housing to infrastructure, Meixell said.
It’s “really quite broad overall. Maybe you invest in a grocery store, maybe it’s a housing complex, could be a start-up software company, a lot of different options,” he said.
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