Opportunity Zone program could allow developers to abuse tax breaks in eastern Iowa
Johnson County features some of the fastest-growing areas in the state, and a federal program might be aiding some areas in their growth.
The program is called "opportunity zones," and it was approved as part of the 2017 Tax Cuts and Jobs Act. Opportunity zones are designed to give tax dollars to spur development in low-income areas.
KCRG-TV9's national I9 investigative TV team found developers are already gaming the system and wasting millions of dollars. The program also has targeted some well-developed areas, including some in Cedar Rapids, Coralville, and other areas of eastern Iowa.
By the definition from the U.S Internal Revenue Service, an opportunity zone is "an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment." Those areas are identified by the cities themselves, then nominated by the governor.
There are more than 60 opportunity zones in Iowa; they include Kingston Village and the NewBo area in Cedar Rapids, the south side of Iowa City, and a large area in Coralville that includes the Coral Ridge Mall and the booming Iowa River Landing.
"That area has been an area that the council has had as a priority for redevelopment for some time," Kelly Hayworth, the City Administrator for the City of Coralville, said.
Hayworth said there has been a demand from city leaders to see more development and better redevelopment in that area for many years.
Mark Nolte, the President with the Iowa City Area Development Group, said since the program was approved in 2017, several developers have approached his group for their aid in starting projects.
"Most of them are multi-family housing projects," Nolte said. "We have one in manufacturing business that kind of lucked into [it]- they were going to the project anyway and realized they were in an opportunity zone."
Hayworth, who helped the city apply for opportunity zones in the city, said the program has worked well to help recruit developers for the area.
"It's brought a wide-diverse group from across the country looking at some of these zones in more detail than we probably wouldn't have talked to otherwise," Hayworth said.
Hayworth agreed that areas like the Iowa River Landing, on the surface, may not seem to need help bringing in investment, but the areas qualified as low income by the definition of the requirements set by the 2017 Tax Cuts and Jobs Act.
"It's all based on census data and low-income tracts, and so that met the requirements there," Hayworth said. "Also there were opportunities for redevelopment in those areas and development."
According to the IRS, those developers can cash in on big tax breaks over a span of up to 10 years, but area leaders point to potential loopholes and abuse.
"The way the program's set up, there could be people using it that we don't even know about because you don't have to let the state or city know that you're using them because it's all within your own tax returns," Hayworth said.
Nolte said it would not surprise him if, in that same 10-year span, some developers are found taking advantage of the system.
"I think what you'll find 10 years from now is there'll probably be some fraud around the country," Nolte said. "There will be some people that take advantage of this. Every conference I go to they say that's probably going to happen."
Despite that potential for misuse, Johnson County leaders said it is worth it. They say the key is making sure the development fits what's needed in the area, and paying attention to red flags.
"We have as a community to kind of check to say: 'hey, is this good for us or not?' And that's a real key and I think a very good question," Hayworth said.
"We're going to do our best to make sure that doesn't happen locally," Nolte said.
While the program is meant to help low-income areas flourish, both Nolte and Hayworth identified the need for more affordable housing.
"That's another important thing that we always look at is the affordability of housing," Hayworth said. "I think this incentive can help get people to consider projects that they may not have otherwise."
Nolte explained it may not result in new developers constructing new units specifically for affordable housing, rather it could create a trickle-down effect.
"It's the same cost of construction, same cost of land, so to turn around and offer construction at an affordable rate can be really difficult," Nolte said. "But if we can keep building kind of the new things and turn that second-generation property into affordable housing, that's how I think we'll as a community make an end road there."
You can view a map of all of the designated opportunity zones nationwide by