Despite many millions of dollars already invested in Port of Dubuque developments, the neighborhood could be home to the first project in the city to take advantage of a federal benefit, the shape of which is still coming into view.
Dubuque City Council members on Nov. 18 will consider signing off on a development agreement for the construction of a proposed six-story building housing apartments and retail space in the Port of Dubuque. Merge LLC’s $20 million project could become a reality in part thanks to a relatively new federal tax incentive that seeks to draw investment to low-income areas.
Federal Opportunity Zones were added to the tax code in late 2017 as part of the Tax Cuts and Jobs Act as an economic development and job creation tool in areas left behind during the recent national economic expansion.
“We leave no stone unturned in D.C. as far as funding goes,” said Dubuque Assistant City Manager Teri Goodmann on Friday. “We were intrigued by new legislation that was part of the tax reform act from a number of years ago.”
The zones allow investors to defer or reduce income taxes on any capital gains they invest in special “opportunity funds” that, in turn, invest in real estate or businesses in low-income areas. After 10 years, investors can pocket any money they earn from their zone investment tax-free.
The zones are based on census tracts drawn by the federal government. To be designated, at least 20% of residents within the census tract must live in poverty or where household income is less than 80% of the area’s median income. And no more than 25% of all census tracts in the state could be nominated by a governor and forwarded to the U.S. Treasury Department for consideration.
In Dubuque, city officials requested three tracts be designated, two of which state officials approved. Those cover portions of the downtown and the North End, including the Port of Dubuque, as areas that could benefit from the tax incentive.
But the opportunity zones have not been an easy package to open.
“It has presented itself as a new tool for local governments, but it has had a somewhat rocky start,” Goodmann said. “Guidance and rules from the Treasury Department were initially slow in arriving. Since, they have been rather complex. It’s not user-friendly yet.”
Other local cities, including Platteville, Wis., also had areas designated as opportunity zones.
Platteville Common Council President Barb Daus, too, described the opportunity zone program as “complex.”
Goodmann acknowledged that these growing pains are “not uncommon” for new programs. She joined other city officials in broaching the subject with U.S. Sen. Joni Ernst, R-Iowa, during Dubuque’s annual Washington D.C. Fly-In in March. There, Ernst — an early and continued supporter of the program — said she appreciated any critiques that would help.
There have been attempts. Just last week, U.S. Rep. Ron Kind joined a bipartisan group in introducing the Opportunity Zone Accountability and Transparency Act.
The bill amends Internal Revenue Service code to create a lengthy list of mandatory reporting requirements for any qualified opportunity fund to track businesses or organizations taking advantage of the opportunity zones. It makes these records public and adds fines and penalties for groups not following the new requirements.
Staff from Kind’s office did not respond to requests for comment for this story. But Kind said in a press release that he was proud of the attempt to improve the program.
“Opportunity Zones were created to bring capital to communities in rural and underserved areas, but in order to ensure that this program is used as it was intended, we need strong transparency and accountability measures in place,” he said.
Daus said the program has proven somewhat more difficult for her community to crack.
“From what I can see, larger municipalities with larger staffs have entered the fields faster than smaller communities,” she said.
Critics worry the opportunity zones will result in tax giveaways for investment that would have occurred anyway, targeting areas such as the Port of Dubuque that have already attracted substantial private investment and carving out pockets of wealth in contravention of the provision’s true aim.
They also say they worry tax breaks will concentrate in high-cost cities and benefit wealthy real estate developers, not local start-up businesses as was intended.
Despite hundreds of millions of dollars poured into the Port of Dubuque, residents who live nearby in the greater downtown area “face acute economic challenges,” said city Economic Development Director Jill Connors.
Median family income is significantly lower in those two areas — $24,397 downtown and $38,902 north — compared to the city as a whole ($60,062), state ($69,419) and nation ($67,871).
More than 30% percent of people living in the opportunity zones also live in poverty, and median housing values are substantially lower than the rest of the city, state and nation, according to city and census figures.
“(Federal lawmakers) created the (Opportunity Zone) program to address the inequities that you mention,” Connors wrote in an email to the Telegraph Herald. “Other programs, such as the low-income housing tax credit, were created to address a need for our low- to moderate-income residents. However, this program, nationally, was not creating investment necessarily in areas that really needed it. The OZ program is location-based for that reason.”
Connors said she understands residents’ perception that this investment is located in an area that is not “distressed.”
“But as a city, we do not have the authority to re-draw the boundaries of federally designated census tracts,” she wrote. “It behooves us to promote private investment in any area of our community, but in particular in our Opportunity Zones.”
Rick Dickinson, president and CEO of Greater Dubuque Development Corp., argues that there is still a significant amount of undeveloped property within the port. He said that, while there are areas of prosperity within the census tracts, “this community desperately needs market-rate rental units,” noting that vacancy rates are very low in existing structures.
“We’re losing candidates that we are trying to recruit for positions available in Dubuque today because we don’t have that amenity in our community,” Dickinson said. “The beauty of Opportunity Zone funding, it’s caused someone from outside of our community to come in and deliver what we desperately need in the community. Whatever incentive made that happen, I’m grateful for it.”
Merge Urban Development Group plans to construct about 180 apartment units, with about 23,000 square feet of retail space on the first level. Monthly rent likely will range from $800 for the smallest units to $1,400 or $1,500 for the largest.
Dickinson said efforts like the True North initiative — which involves converting dilapidated rental properties in the city’s North End into single-family, owner-occupied homes — address one housing need. This project will address market-rate housing needs.
Dickinson argues the project “in no way, shape or form” dilutes the city’s or GDDC’s commitment to address subsidized housing needs for low- to moderate-income families.
“And we’re not robbing Peter to pay Paul,” he said. “We’re actually bringing a new Paul into the mix.”