In spring 2017, Nelson Construction & Development unveiled plans for a $54 million hotel, apartment and retail development immediately south of Drake University.

Eight months later, Congress passed sweeping tax reform legislation that included an incentive program for investors to place capital gains into projects located in low-income neighborhoods.

The new Opportunity Zone program expanded the pool of investors interested in Nelson’s Drake project, said Alexander Grgurich, the company’s director of development and chief operating officer. Grgurich said he believes the project is the first large-scale development in Iowa to take advantage of the Opportunity Zone program.

“It helped us get exposed to new investors who probably would not have looked at the Drake neighborhood area for a project to invest in,” he said.

Nationally, the Opportunity Zone program is touted as having the potential to create jobs and spark economic development by encouraging long-term investment in low-income areas. Federal officials estimate that more than $100 billion in private money could be invested in Opportunity Zones, census tracts in which poverty and unemployment rates exceed national averages.

“This incentive will foster economic revitalization and promote sustainable economic growth,” Treasury Secretary Steven Mnuchin said in a release last fall.

For investors, the program is a way to reduce, defer, and in some instances eliminate tax payments on capital gains from unrelated investments.

In Iowa, 247 of the state’s 825 census tracts met Opportunity Zone eligibility requirements. The state received 108 applications for Opportunity Zone designations. After a review by state and federal officials, 62 tracts were selected. Their designation as an Opportunity Zone will be in place until Dec. 31, 2028.

“We tried to identify areas where we thought the [Opportunity Zone] funds would be most effective,” said Alan Kemp, executive director of the Iowa League of Cities and one of seven Iowa Opportunity Zone committee members.

Three Opportunity Zones are located in the Des Moines area: Two adjacent zones surround Drake University. A third is in West Des Moines’ Valley Junction.

“It’s always good to have another tool that encourages development,” said Naomi Hamlett, Des Moines’ economic development coordinator. “Whether it gets used or not is hard to say.”

Idea behind program not new

Encouraging development and job creation in blighted areas is not a new concept in the U.S.

In the early 1970s, when businesses relocated from cities to suburbs, policymakers introduced Enterprise Zones as a way to curb urban flight. Businesses that located in an Enterprise Zone received tax breaks and special financing.

Throughout the 1990s, Congress created Empowerment Zones, Enterprise Communities and Renewal Community programs as a way to reduce unemployment and spur economic growth in low-income census tracts. Grants and tax incentives were offered to stimulate development and business growth.

The Opportunity Zone program is based on similar concepts.  

“These types of tax incentives are ways to create development in areas developers typically don’t want to go or haven’t been,” said Jackie Johansen, principal of Shattered Glass Development, a Des Moines-based commercial real estate company.

Whether that will occur is yet to be determined.

Earlier this year, the Tax Foundation published a research paper that questioned whether programs for targeted areas create jobs or spark new developments. The foundation, based in Washington, D.C., is an independent tax policy research group.

“There is no academic consensus on whether place-based incentive programs work as intended,” wrote Scott Eastman, federal research manager, and Nicole Kaeding, director of federal projects, in the paper.

In addition, “place-based incentive programs … subsidize investments that would have occurred anyway, and displace low-income residents by increasing property values and encouraging higher skilled workers to relocate to the area,” they wrote.

Said Eastman, in an interview: “This program is very generous for investors because of those capital gains benefits. There are very few strings attached to what the funds can be invested in. What we’re skeptical about is whether economically distressed areas will actually benefit from this program.”

Drake plans already in works

Plans to spur redevelopment around Drake University have been in the works for at least three years. In 2016, the university asked developers to submit proposals for development of 2.7  acres on the south side of University Avenue that had been occupied by parking lots and Drake-owned houses rented to students.

University officials selected Nelson Construction’s proposal for a hotel, restaurant, retail and apartments.

Along with the redevelopment of University Avenue on each side of 26th Street, Drake and the city of Des Moines plan to make improvements to University’s streetscape that would include a bike lane, wider sidewalks and a median with landscaping. In February, the Harkin Institute for Public Policy & Citizen Engagement announced it would build an $8 million building near 28th Street and University. Private donations are being raised to pay for the two-story structure.

Drake officials are hopeful the availability of investment money from Opportunity Zone funds will trigger other redevelopment, said Ryan Arnold, the university’s director of community engagement. “We see the potential for using Opportunity Zone funds on the major corridors – M.L. King, Forest and University.

“What we’re trying to drive home is the diversity of the neighborhood and that we would like to maintain that diversity.”

Arnold said Drake officials have talked with developers and others about using Opportunity Zone funds in the corridors near Drake not only for new developments but also for new businesses. He said there’s been interest from managers of the large, national funds as well as people interested in creating funds locally. He declined to be specific.

“We’re still exploring possibilities,” Arnold said.

Larry James Jr., a Des Moines real estate attorney, said there’s interest “from around the country” in investing in developments in the Drake area “now that it’s an Opportunity Zone. The neighborhood needs reinvestment.”

“Now developers need to come up with projects that make sense.”

Iowa City group hoping to attract investors

One thing Johansen said she’s noticed in cities located in other parts of the country is the aggressive marketing of ideas for development in Opportunity Zone designated areas. For example, Cleveland-area officials developed an investment prospectus and website targeted at businesses, developers and investors. Similar information was put together by officials in Indianapolis, she said.

“It’s really in each city’s hands on how loud they want to be about their Opportunity Zones and what they would like to see occur in them,” Johansen said.

The Iowa City Area Development Group, a nonprofit economic development organization, has also developed a prospectus for potential Opportunity Zone fund investors. The document explains why investors should invest in projects located in Iowa City and Coralville, which have four Opportunity Zones. In addition, the prospectus explains the Opportunity Zone program and includes specific information about Iowa City and Coralville as well as the census tracts in which the zones are located. Among the information included about the areas is the number of residents and housing units in each tract and residents’ median income and educational attainment.

The prospectus also includes information about where in each Opportunity Zone potential for development exists and what types of development would do well in the areas. For example, in the Towncrest Commercial Area, the prospectus says opportunities exist to integrate new housing including townhouses and apartments built above commercial space. Near the Iowa City campus of Kirkwood Community College, there’s a need for student housing, commercial development and space for college classrooms.

Mark Nolte, president of Iowa City Area Development, said the group has contacted investors and developers locally and nationally about potential development opportunities in the four areas. Many are asking for more information, he said.

“Our message is that these are some of the safest census tracts in the country in which to invest,” Nolte said. “We did not see a dip in property values in these areas during the recession. And, as we may be heading into another recession, we’re trying to sell how recession-proof these areas are.”

Nolte said while firms have shown interest in investing in Iowa City and Coralville Opportunity Zones, some have been turned away because they wanted to build hotels. 

“We are over capacity in that area now and we’re just being honest with them,” he said. “We’re hoping to make the most impact on the housing side – creating housing stock we know will fill in gaps we have in the community.”

Packaging other incentives with Opportunity Zones

The role cities can play in spurring development or business expansion is limited, said Katie Hernandez, business development coordinator for the city of West Des Moines. However, cities can offer other incentive programs that can be packaged with Opportunity Zones, she said.

“That’s what we’re doing – providing information about Valley Junction and the different incentive programs we have,” Hernandez said. “Our role is to offer up these programs to keep the focus on Valley Junction.”

Among the incentives West Des Moines is offering are the Property Improvement Fund, Regulatory Compliance Fund, Property Tax Rebate Program and Upper Story Housing Program.

Hernandez said West Des Moines officials want to see investment dollars continue to be pumped into Valley Junction, a historic area with roots that reach back to the mid-1800s.

“We are interested to see investment continue to flow into Valley Junction; Opportunity Zones adds an additional level that will continue to attract that investment,” Hernandez said. 
 
Des Moines officials are also hoping investment dollars will flow into the Drake area as well.

Nelson Construction & Development plans to break ground on the five-story Home2 Suites this spring. The 124-hotel-room project also will include 11,000 square feet of retail space. Next year, the company plans to break ground on the apartment building project, which will also include ground-level retail space.

Grgurich said the project’s second phase will also use investment money from Qualified Opportunity Zone Funds to help pay for the project.

“We want to build on the experience we’ve gained with Opportunity Zone funds for the hotel project and then implement that for the apartment project as well,” he said.

Area developers and investors have inquired about Nelson Construction’s use of the investment tool, Grgurich said. “They are watching.”

The question that is unanswered, however, is whether the investment tool will help spur more new development in the area.

“That’s the question nationwide as well,” Grgurich said. “For real estate projects, I think it will cause more investors to look at potential projects in areas they haven’t looked at before.

“Whether those projects actually happen will be a byproduct of how strong the project is on its own.”