Cities Seek to Align ‘Opportunity Zone’ Capital With Local Priorities
December 14, 2018
Erie, Pennsylvania, located on the shores of the great lake that shares its name, has seen its share of difficulties in recent decades, as the manufacturing sector there has eroded and its economy morphs into one that is less reliant on heavy industry.
“It’s been a steady population and economic decline,” John Persinger, CEO of the nonprofit Erie Downtown Development Corp. told Route Fifty last month. “Like, we haven’t had one year of growth.”
“We’ve just been declining since 1960,” he added.
Persinger notes that a ZIP code where his organization works was identified earlier this year as the poorest in Pennsylvania. And materials the group presented at a workshop last month show that 6,600 of the city’s 44,790 houses are vacant or abandoned.
But there are bright spots, too.
Erie Insurance and a major medical center are both expanding in the city, a private developer is moving ahead with a large project on the waterfront, and the downtown development corporation has ambitious plans for real estate it has acquired.
It’s against this backdrop Persinger and others are working to build Erie’s reputation as an attractive place for investment through the recently formed Opportunity Zones program. Created by last year’s federal tax overhaul, the program is designed to entice investment in low-income census tracts by offering people and businesses tax breaks on their capital gains.
Erie is just one place around the U.S. where state and local officials, and others involved in economic development, are working to position their communities to benefit from investments that could flow through the so-called Opportunity Funds that are central to the program.
“We’ve been on this really since day one,” says Persinger’s colleague, Matthew Wachter, vice president for finance and development with the downtown development corporation. “It was something that was written, very obviously written, for communities like the city of Erie, and there are a lot of Erie’s out there,” he added.
Nationwide there are about 8,700 census tracts—selected by governors and approved by the federal government—that are designated as “zones” and eligible for Opportunity Fund investment.
Managers of Opportunity Funds have no obligation to work with states or localities as they decide how to deploy capital in these places. So a key concern for many state and local leaders is how to guide investors to projects that align with their community development goals.
“The question is: How do cities tell their story?” said Mayor Greg Fischer of Louisville, during a recent phone interview. “And then how intentionally can mayors lead the investors to the type of investments that we’ve got in our cities’ master plans?”
“Most cities, in terms of the kind of growth that we’re trying to get right now, are interested in that investor that also wants to leave a social impact,” Fischer added. “We certainly appreciate investment in our cities. But we want to create local income and local wealth.”
Mayor Michael Tubbs of Stockton, California offers a similar take.
“I think part of it will be, sort of, attracting the right type of investors, but also steering investment to the things we care about,” he said.
Some early best practices for communities looking to take advantage of the program appear to be emerging. One involves cities putting together a pitch, or “prospectus,” with information for investors about their economies, and assets and possible projects in their zones.
Meanwhile, people like Persinger and Wachter are weighing how Opportunity Zones investments can be combined with other capital, including bank financing and public subsidies like state and federal tax credits, to make deals work out financially.
“The national government is issuing rules,” says Bruce Katz, director of the Nowak Metro Finance Lab at Drexel University. “But cities are the places that are actually creating market norms here.”
Developing a Vision for the Zones
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Some of the first cities to complete the documents include Erie, Louisville and Oklahoma City. Stockton and South Bend, Indiana were also early movers.
“We have a bunch of other cities lined up to prep a prospectus in the next month or so,” Katz said by phone in late November.
The advisory council that steers Accelerator for America is chaired by Garcetti. Other members include Katz, multiple mayors and other city and state officials and business leaders.
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Katz says that, with the guide, assembling a prospectus should not be terribly difficult.
“The data analysis and the data collection is not the challenge,” he said. “What really has to happen here is that public, private and civic stakeholders get together and make decisions about both the vision for economic development of particular zones and how to execute it.”
To put it another way, he says the prospectus is a declaration of a place’s strategies and assets within its zones.
Accelerator for America wants to have 50 cities complete the process by March of next year and around that time plans to hold a conference at Stanford University, where representatives from those places can meet and engage with Opportunity Zone investors.
Last week, the National Council of State Housing Agencies said it had identified about $15 billion of anticipated investment across 53 Opportunity Funds it is tracking. The funds range in size from less than $100 million to $3 billion, and most of them, 47, were focused at least in part on commercial real estate investments.
Katz says he’s visited about 100 zones all over the country, where possible projects range from remaking industrial “brownfield” sites and dead malls, to building clean energy infrastructure.
He predicts that the amount of investment that flows through the funds could exceed $100 billion.
But Katz adds that this money on its own will not solve the problems afflicting many zones. “There’s a lot of work to do here that tax-advantaged capital will not do by itself,” he said.
Erie’s Prospectus
The city of Erie has about 97,000 residents, down from around 140,000 in 1960. It is located in northwest Pennsylvania, about halfway between Buffalo and Cleveland on Interstate 90.
Locomotive-maker GE Transportation ###a href="http://www.goerie.com/news/20180525/ge-transportation-no-longer-eries-top-employer" target="_blank">used to be the largest employer in Erie County. But the company lost that distinction earlier this year in the wake of job cuts. Its local workforce in decades gone-by was around 20,000. Now it’s about 2,000 to 3,000.
GE’s shrinking presence reflects broader trends in the local economy.
Bureau of Economic Analysis statistics show the Erie metro area has seen manufacturing jobs drop to 19,933 in 2017, from 31,607 in 2001. At the same time, manufacturing economic output in the metro area, adjusted into 2009 dollars, slid from $2.7 billion to $1.9 billion.
Income and poverty figures are troubling in the city. U.S. Census Bureau estimates for 2017 show the poverty rate in Erie at about 26 percent, and the median household income for 2013 to 2017 at around $35,000. For Pennsylvania as a whole the median income was $56,000.
One sector where there’s been notable employment growth in the Erie metro area is the health care and social services industry, which grew to 25,980 jobs last year, from 18,941 in 2001, BEA estimates show.
Erie’s 74-page investment prospectus is framed as the “story” of a city “wrestling with renewed optimism yet persistent challenges.”
Early on, the document touts local assets like 470 acres of land situated on Presque Isle Bay, over one million square-feet of commercial and residential property ready for development, and a port crane and dry docks that are some of the largest on the Great Lakes.
Later, the document provides specifics about the city’s eight Opportunity Zones, some of it in maps showing which zones are suited for residential, commercial and industrial development, and how they overlay with state and local incentive programs.
The prospectus also zooms in further to look at specific areas within the zones.
There’s the bayfront for example, where Erie Events, formerly the Erie County Convention Center Authority, owns 29 acres that includes the site of a former shingle plant, and is where a convention center and two hotels are located. The prospectus points out that a private developer, Scott Enterprises, broke ground in May on a 10-phase, $160 million mixed-use development in this area.
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It also outlines the city’s “inclusion strategy,” covering topics like “equitable growth” and developing real estate without displacing residents, and Erie’s “market strengths,” like the $600 million of investment by local businesses and other institutions in recent years.
Persinger and Wachter say creating the document has helped to foster new interest in the city and in their work. “It’s amazing the attention and the exposure that our footprint in the city of Erie is starting to receive,” Wachter said. “We’re suddenly having conversations with national-level investors that didn’t occur before.”
State Efforts in Connecticut
While local leaders in city’s like Erie have moved aggressively in response to the Opportunity Zones program, other jurisdictions have been slower taking action.
In Connecticut, Catherine Smith, commissioner of the state’s department of economic and community development, said last month that, outside of major cities, many smaller towns in the state were still in the earlier stages of figuring out how to approach their zones.
Her department has been holding meetings around the state with economic development agencies, nonprofits and developers. Smith described the meetings as working sessions, where attendees discuss zone boundaries, shovel-ready projects, and possible zoning issues.
“We’re trying to make sure that each and every municipality has one, or two, or three, really good ideas that they can market more effectively to get things going in their zones,” she said.
Smith pointed out that Connecticut’s zones were deliberately selected to overlap with other programs geared toward economic development, like the state’s “enterprise zones,” which provide local property tax abatements for certain projects.
“We feel like there’s going to be some really good uses of this program, pretty quickly,” Smith added. She noted, for instance, that the state’s “###a href="https://www.ctgreenbank.com/about-us-2017/" target="_blank">green bank,” which focuses on clean energy financing, has discussed the possibility of projects like “fuel cell farms” in zones.
Smith takes the view it’s still too early to tell what the appetite for the program will be like in Connecticut. “So far, I wouldn’t say it’s going to take off like a rocket,” she said. “I think it’s going to be an enhancement to the good things we’re already trying to do.”
Considering the ‘Capital Stack’
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The Erie Downtown Equity Fund, a for-profit limited liability company, is set up to provide “gap financing” for projects where the development corporation can’t otherwise muster sufficient funds.
The equity fund operates at an “arm’s length” from the development corporation, said Wachter. It has its own board and investors in the fund are aware that the returns they get are likely to be lower than what they could reap from hotter types of investments, he added.
A number of local companies and institutions have committed to invest in the equity fund, ###a href="http://www.erieddc.org/news/EDEF-April-13-2018.html" target="_blank">including Erie Insurance, Gannon University, ErieBank, and plastic goods maker, Plastek Group. The development corporation says investors have pledged about $27.5 million in total.
Erie Insurance became Erie County’s top employer when GE Transportation slipped into second place this year. Wachter notes the company is in the midst of an expansion that involves a new $135 million office building and adding hundreds of jobs.
Near the site of the insurer’s project, Erie Downtown Development Corp. has acquired eight parcels of real estate, occupying about 118,000 square feet, located within an Opportunity Zone.
The nonprofit has plans to transform the properties, which include one building that used to be a Greyhound bus station and another that was once the offices of a printer, into a mixed-use development with residential lofts, a food hall, workspace for startups, a fitness center, and other commercial and retail space.
There are three possible “capital stack” scenarios that the development corporation has modeled to cover the cost of the project, estimated to be about $21 million. Each has different levels of Opportunity Fund investment: 0 percent, 15 percent and 30 percent.
In the rosiest scenario, Opportunity Fund investment totals $6.3 million, and the equity fund kicks in about $4.4 million, or 21 percent of the total cost. If zero Opportunity Fund dollars flow to the project, the equity fund share rises to 61 percent, or about $12.8 million.
Some other parts of the proposed capital stack for the project include bank financing, local government revolving loan funds, and tax credits for rehabbing historic properties.
“We’re going to do this project, essentially, come hell or high-water,” said Wachter. “We are optimistic that we will be able to receive 30 percent funding through Opportunity Fund investments.”
Erie might seem like a tough sell when it comes to luring investors. But Persinger says the potential is there for returns. “Erie is just a place that hasn’t attracted much capital in the past,” he said. “And so now’s the time to get in on the ground floor.”