PA Post: Erie Lost People for Decades. Now, Leaders There Hope a New Tax Break Will Transform the City

Ed Mahon (Erie) — John Persinger pointed to the pieces of wood marked with an orange “H.”

The “H,” he explained, stands for “hole in the ground.”

Persinger was giving a tour of the first floor of an old brick building in downtown Erie. It sits across from a big public square named after a naval commander from the Battle of Lake Erie during the War of 1812.

The building, constructed in the mid-19th century and previously home to a bar, is a short walk from city hall.

A Starbucks is located around the corner, but there were lots of vacant spaces on this stretch of North Park Row on a recent day.

Inside, metal rods were propped against the front brick wall to provide extra support during the rehab project. The boards with the orange “H” marked on them were — somewhat counterintuitively — the safe ones to walk on, because they were the newer ones that contractors added.

“Some of these older boards will collapse underneath your feet,” Persinger, the CEO of the Erie Downtown Development Corporation, said during the tour.

Persinger, 38, didn’t grow up in Erie. But the Harvard University and Notre Dame Law School graduate moved to this northwestern Pennsylvania city to be closer to his extended family members.

The Erie Downtown Development Corporation plans to turn the North Park Row into a culinary arts district.

Now, he’s leading one part of a larger revitalization effort. The building he’s showing off, he hopes, will become a food hall featuring local chefs on the first floor and apartments above.

“Just walk where we walk,” Persinger said, cautioning a visitor as he moved toward a series of brick arches where he said chefs will set up when the project is complete.

The food hall is part of a more than $33 million project to turn the block into a culinary arts district. Persinger says the project will boost the number of workers in this part of the city from about 40 to more than 300, while also contributing more than $800,000 in local property taxes to the city government, up from less than $40,000 a year today.

A new federal tax incentive — included in the 2017 federal tax overhaul championed by President Trump — is already benefiting the North Park Row project. The project sits in a federal “opportunity zones,” one of eight in Erie. North Park Row sits in a zone where 45 percent of families have income below the poverty level, according to the most recent census data.

Business, government and community leaders in Erie have big plans for the city. Persinger said his group is trying to to take a revitalization process that would normally take 25 years — and speed it up to five.

“We couldn’t do that without opportunity zones,” he said.

But the effort to lure investment and jobs to Erie faces a lot of competition — investors could choose to put their money into one of the more than 8,000 opportunity zone communities across the country, including the 300 in Pennsylvania.

“I realistically think there’s going to be a very, very small number that actually see investment occur in them,” James Grunke, president and CEO of the Erie Regional Chamber and Growth Partnership.

But Grunke is bullish on opportunity zones in Erie. He said leaders there positioned the city to attract opportunity zone investors early on.

“Erie, Pennsylvania, is actually … leading the country in understanding how best to use opportunity zones as a tool,” said Rick Jacobs, whose job as CEO of Accelerator for America has him working with government and community leaders across the country to attract opportunity zone investments.

Erie’s leaders, Jacobs cautioned, were also quick “to understand that opportunity zones are only a tool” — and that opportunity zones can’t turnaround a community on their own.

Erie’s decline as a manufacturing hub

Gus Paliouras’s family has owned New York Lunch on East Avenue in Erie for about 50 years.

The restaurant offers hot dogs, Greek burgers, and Mount Olympus gyros; family photos are displayed on the walls.

New York Lunch was crowded on a recent weekday afternoon. But decades ago, the shop used to open its doors more often — about 150 hours a week. Now, the business is down to about 47 hours a week.

“It’s just been challenging, because so much industry has closed up and either just shut down, gone out of town or overseas,” said the 53-year-old Paliouras.

Gus Paliouras' family has owned New York Lunch on East Avenue in Erie for about 50 years.

The eatery’s reduced schedule is an anecdotal way of measuring Erie’s manufacturing decline, but it’s a highly personal measure of how the loss of so many blue collar jobs affected unrelated local businesses.

The county still has more manufacturing jobs on average than the rest of Pennsylvania, but the number has declined significantly over the past six decades.

A General Electric locomotive plant employed about 20,000 workers after World War II, but just a few thousand work there now. Other companies that shut their factories here include Erie Malleable Iron, International Paper Company and American Meter Company.

The loss of so many middle class jobs put the city’s economy into a tailspin. Erie now has the poorest zip code in Pennsylvania by one measure. And the Pennsylvania Department of Education put the city’s school district on financial watch in 2016.

As jobs were lost, the city experienced a long population decline, from about 140,000 in 1960 to an estimated 96,000 in 2018. Meanwhile, the county’s population also declined — part of a trend across much of western Pennsylvania.

Given the decades of retrenchment, realizing a turnaround will be a challenge for Matt Wachter, an attorney who returned to his hometown after working at an accounting firm in Philadelphia and New York. He’s now the vice president of finance and development for the Erie Downtown Development Corporation.

Wachter said it’s difficult to make development projects work in Erie with traditional financial incentives. An investor could buy a building for $1 million, spend another $1 million just to get it up to code — but then the building might only be appraised at $1.6 million, he said.

“So you have a $400,000 gap,” Wachter said. “Well, you can’t go to a traditional bank with that. You can’t go to a traditional investor.”

And that’s where federal opportunity zones come in.

As part of the 2017 tax bill, federal lawmakers created the opportunity zones initiative with the stated aim of spurring investment in distressed communities. Individuals and businesses can defer and reduce their capital gains taxes by putting their profits on other investments toward projects, properties and businesses in certain low-income U.S. census tracts.

There’s another big benefit for investors, according to Evan Weiss, former director of PEL Analytics, a firm that specializes in financial recovery and economic development.

If someone puts $500,000 into a new building, and that building grows in value by $500,000 — then, after 10 years, that additional $500,000 is excluded from the capital gains tax.

That makes investing in a qualified opportunity zone fund “a pretty lucrative tax incentive,” Weiss said during a webinar with the Pennsylvania Department of Community and Economic Development.

But it doesn’t mean the money is going to show up in communities without a lot of advance work.

“So much of this, I think, has been framed as, ‘There’s going to be money falling from the sky, from Wall Street and from Silicon Valley,’” Weiss said. “But in reality, a lot of it’s going to be very locally based. And if you can walk away with one message from this, it’s, ‘[Try] to get everyone locally in your community engaged.’”

Why and how Erie embraced opportunity zones

Erie got engaged early.

Grunke, the president and CEO of the Erie Regional Chamber, said a change in attitude happened in the city around the same time opportunity zone legislation was making its way through Congress.

“It’s just been a community of historical decline — that I think everything became aligned to say, ‘We have to deploy every tool we can think of to incentivize investment,’” Grunke said.

Shortly after the tax bill passed, Wachter worked with city officials to identify the areas that could most benefit from the incentive. They reached out to state government officials in Harrisburg early on.

“We were told that we were the first in the state to really act on it,” Wachter said. “So that was exciting.”

Gov. Tom Wolf’s administration designated 300 census tracts in Pennsylvania to be part of the opportunity zone program. The Department of Community and Economic Development said decisions were based on the potential for new investment to eliminate poverty, whether the areas were priorities for local economic development partners, and geographic diversity.

Statewide, 120 of the zones have a poverty rate above 35 percent, according to the department.

In five of Erie’s eight opportunity zones, more than 35 percent of families had income below the federal poverty level. In the other three, the poverty rate for families was above 20 percent, according to the most recent census data. And the poverty rate for individuals is often even higher than the rate for families.

Some of the city’s opportunity zones are physically connected, and all are located close together.

One zone includes the Bayfront Convention Center, which has views of Presque Isle Bay from three sides and is connected to a hotel by a sky bridge. Business leaders hope to draw restaurants, retail stores, apartments and condos to the waterfront area.

The tracts also include residential neighborhoods on the east side of Erie, including an area where only 25-percent of people own their homes. Erie’s boosters hope to attract investors interested in building new owner-occupied homes, renovating existing ones and helping with blight removal.

Brett Wiler, who was hired by the Erie Regional Chamber to lead recruitment efforts for investment in the opportunity zones, said officials are pitching both the potential economic and social impact of investing in Erie.

“We like to say, ‘You invest $1 million into Philadelphia, it’s a drop in the bucket, right?’” Wiler said. “You invest $1 million into Erie, Pennsylvania, you have the real possibility to change lives.”

At the time the state approved Erie’s opportunity zones, Wiler was the business development officer for the city.

“The inherent challenge for a city like Erie is that perhaps the historical trends tell one story, but we believed that there was a much more compelling story to be told to outside investors and developers,” Wiler said.

Wiler connected with Accelerator for America, which promotes ideas for community-driven change. The group was already working with three other cities to create a lengthy investment prospectus for each, describing the community and the potential for investment.

“Very, very quickly, Erie, Pennsylvania, stepped up and said we’re doing one of those ourselves,” said Jacobs.

Wiler and others tried to capture that potential in a prospectus first published in October 2018. The document boasts that the Erie area has nearly 51 miles of shoreline and the natural peninsula of Presque Isle State Park. It is Pennsylvania’s only port access to the Great Lakes, and it’s a relatively short drive to Pittsburgh, Buffalo, Cleveland and Toronto.

The area recently saw nearly $600 million in capital project investment from a number of enterprises, including Erie Insurance, which is the city’s only Fortune 500 company. It’s also home to several universities, including Gannon University and a satellite Penn State campus.

But the prospectus document also described the challenges of investing in Erie, noting the region’s population losses, a lack of 21st century manufacturing space and racial divides.

Jacobs called the city’s prospectus “incredibly robust and, was, frankly as impressive or more impressive than anything we’d seen.”

Two of the most visible leaders of Erie’s opportunity zone effort are Mayor Joe Schember, a former banker, and Persinger, now the head of the Erie Downtown Development Corporation.

Two years ago, the two ran against each other in the mayoral race: Persinger as the Republican candidate; Schember as the Democrat.

Jacobs has worked closely with both of them. He pointed to their cooperation as an example of Erie’s strengths.

“They’re working hand in hand,” Jacobs said. “…And I think there’s a lot to be said for Erie in that ethos that a lot of us could learn from.”

Local leaders have offered additional investment incentives in recent months. In June and July, the city, school district and county approved expanded real estate tax breaks for homeowners and businesses that make improvements to their properties.

Even if a property increases in value, homeowners will pay a property tax based on the old value for 10 years. The same is true for businesses when it comes to city and county property taxes, although for school property taxes the offset will only apply to 80 percent of the increased value.

In August, the city council approved a contract to bring free public Wi-Fi to the opportunity zones in the city.

That same month, during an event aimed at attracting investments from people with ties to the region, Erie Insurance announced that it was creating a special $50 million opportunity fund.

Founded in the city in the 1920s and today the county’s largest employer, Erie Insurance also is working on a $135 million expansion project in the city.

Its chief executive, Tim NeCastro, joined with other leaders to help create the Erie Downtown Development Corporation in 2017. The first investment for the Erie Insurance opportunity zone fund is $2.6 million for the culinary arts district project being overseen by the development corporation.

“That’s huge. That is absolutely huge,” Wachter said. “This a Fortune 500 company that has to report to shareholders, has investors, and they can invest anywhere in the United States.”

Matthew Cummings, a spokesperson for Erie Insurance, said the company picked the culinary arts project for its first opportunity fund investment because the area is a designated food desert by the U.S. Department of Agriculture, and people in downtown Erie lack easy access to sources of fresh, healthy food.

In addition to the food hall, Persinger’s group wants to build a public market, similar to ones in York and Lancaster, where people can buy fresh produce, baked goods, meat, fish and other food. The public market will accept food stamps.

They also plan to add a community kitchen where caterers and bakers can rent space. And they want to create a culinary incubator where people looking to start or grow a food and beverage business will receive marketing, accounting, legal and other support.

“We are hopeful that Erie Insurance’s initial investment will help bolster the capital stack necessary to make the North Park Row project a reality and give other potential investors the confidence they need to make investments of their own,” Cummings said in an email.

The other big opportunity zone announcement in Erie was a decision by the Connecticut-based company CapZone Impact Investments to partner with an Erie group focused on making the city a home for companies and workers in the cyber security and “Internet of Things” technology fields. CapZone and the Erie Innovation District announced the creation of an investment fund that will provide up to $10 million for startup companies.

Matthew McGuire, vice chairman of CapZone, said one reason his group selected Erie is because of the collaboration between universities, business leaders, elected officials and others.

“That broader community support told us that whatever hiccups will happen along the way, there’s a group invested in really making this succeed,” McGuire.

Since that announcement, McGuire said his company has heard from other potential investors, who told him they’ve never thought about Erie but want to know more.

“Our view is that Erie is one of those places that has gotten overlooked historically,” McGuire said. But he thinks that’s because the capital venture market has been working inefficiently by following where money is already going, instead of looking for the best opportunities.

Still, other projects in Erie are waiting for investors.

Gary Horton leads the Urban Erie Community Development Corporation, an organization that hopes to transform nearly 20 acres of an industrial park in an opportunity zone on Erie’s east side. In the zone, nearly 49 percent of families have income below the poverty level.

Horton hopes people will invest in separate projects for a multi-use health and wellness center, urban agriculture and a solar farm. He said the project would benefit people with low incomes who live in nearby public housing.

Gary Horton leads a group that wants to transform an industrial park in Erie, PA, and create a solar farm, health and wellness center, and an urban agriculture project.

In September, the property was overgrown with wildflowers and there was spray paint on the sign identifying the Joyce A. Savocchio Business Park.

Horton said the land was vacant for many years, and people are eager to see development take place quickly there.

“Now I’m being asked, and it hasn’t even been a year … ‘What are you doing? When are you going to do it? You know, show me that you can walk on water. Where’s that rabbit you’re pulling out the hat?’” he said.

Horton said the group has received “nibbles,” but so far no opportunity fund investors are committed. He and his partners aren’t singularly focused on luring investment through the opportunity zone program, but they are trying to identify what type of project has the best chance of providing a profit for a potential opportunity zone investor.

Wiler thinks that sort of pre-investment study is crucial. Even if an investor is largely interested in putting money there because of the social impact of creating family-sustaining jobs, that investor will still expect some financial return.

“I certainly believe that there is potential to figure that out,” Wiler said.

Time is a factor on these investments. The Pennsylvania Department of Community and Economic Development recommends that if investors want to maximize their tax incentives, they should consider committing investments by the end of this year.

Impact hard to measure

A recent New York Times story took a skeptical look at opportunity zones, with the headline: “How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich.”

The article described how “billions of untaxed investment profits are beginning to pour into high-end apartment buildings and hotels, storage facilities that employ only a handful of workers, and student housing in bustling college towns, among other projects.”

The opportunity zones initiative offers an incentive to invest, but it doesn’t include any reporting requirements for, say, the number of jobs created.

Scott Dunkelberger, special adviser to the secretary for the Pennsylvania Department of Community and Economic Development, said the agency really has no way to measure the impact.

“It’s really going to be incumbent on the federal government to sort of quantify, if they’re able to do that,” Dunkelberger said.

Accelerator for America’s Jacobs said some people are pushing for changes increased reporting requirements at the federal level. In the meantime, he said one of his group’s partners is developing a tool to better measure the impact.

Opportunity zone investment can occur in Erie without Wiler and others knowing. Wiler said some business and property owners have no interest in publicly announcing they are working on opportunity zone projects. A privately-owned company might not want to let competitors know about expansion plans, he said.

Locally, business leaders say a big part of their focus will be to convince people to invest some of their money locally instead of sending it to a typical investment management company based in large a financial center like New York.

For example, Wachter said retiring Baby Boomers who sell family-owned manufacturing businesses could be convinced to put some of that profit back into Erie.

“This is a tool to help us do that,” Wachter said of opportunity zones. “And we’re starting to have a lot of those conversations now.”

One of the bigger concerns some urban policy experts have raised about opportunity zones is that they could accelerate gentrification in some neighborhoods.

To address concerns about the impact on residents, Wiler’s group is encouraging potential investors to meet with neighborhood organizations and stakeholders, and pursue projects that bring employment opportunities and have an affordable housing component.

But Wiler thinks gentrification is a problem that applies to big cities like San Francisco, New York City and Boston, not really to Erie. He said the last thing Erie business leaders want is to displace people in a city whose population is shrinking.

“We need every single person in Erie to stay,” Wiler said. “And we need to bring some more people into Erie.”

Still, the culinary arts projects in downtown Erie is forcing some businesses to leave North Park Row.

Douangchay Phetsavanh, who immigrated from Laos almost 40 years ago, became one of the owners of Khao Thai Restaurant about five years ago. The restaurant seats more than 80 people, with Buddha and elephant statues throughout.

Phetsavanh, 61, found out earlier this year that the Erie Downtown Development Corporation wouldn’t renew the restaurant’s lease at the end of October.

Douangchay Phetsavanh said she and other owners of Khao Thai Restaurant were disappointed they could not remain on the North Park Row while the Erie Downtown Development Corporation makes improvements to the area. Khao Thai owners plan to open the restaurant in a new location outside the city in November 2019.

We were shocked. We were devastated, at first,” Phetsavanh said.

She said they wanted to stay downtown, but didn’t find a spot in Erie that worked. They plan to open their new restaurant location outside Erie, in Millcreek Township, in November.

“We don’t know what’s going to happen at the new location,” Phetsavanah said. “We just hope that our supporters will continue to follow us.”

In July, the board for the Erie Downtown Development Corporation created a $75,000 tenant assistance fund to help business owners and renters that have to move as part of their projects.

“We’re trying to decrease the impact on these tenants as much as we possibly can,” said Nicole Reitzel, the corporation’s vice president of community engagement.

How that money is awarded and who is eligible appeared to cause some confusion in Phetsavanh’s case.

Her daughter-in-law, Jessica Inthavong, said she didn’t realize the family was eligible until this month.

“Something is better than nothing, I guess,” Inthavong said. “We’ll appreciate whatever we can get.”

The potential for beauty

Persinger said the North Park Row buildings that will become the envisioned culinary arts district will be taken down to the studs and rebuilt so that they can last for another 150 years. The extensive nature of the renovations is one more reason why opportunity zone tax incentives are vital to making projects like this pencil out for investors.

“We are dealing with a huge challenge with these buildings,” Persinger said.

As the tour of the building continued, Wachter pointed out mold and decay on the second floor and noted areas where workers had removed rows and rows of old items that accumulated over decades: skis, typewriters, blenders, bar paraphernalia and more.

Matt Wachter, left, and John Persinger, right, plan to create a food hall inside the site of a former bar and music venue in Erie, PA. The food hall is part of a more than $33 million project of the Erie Downtown Development Corporation to create a culinary arts district in the city.

More cleanup was needed. A Teenage Mutant Ninja Turtles kiddie pool was collecting water dripping through a ceiling on one floor. Bricks were deteriorating, leaving red dust on the floor. On the fourth floor, a bin of dead birds was found when the corporation bought the property, Persinger said, and everyone has been reluctant to touch it.

But Persinger and Wachter are upbeat.

Hundreds of potential investors walked through the future food hall space back in August. And the funding announcement from Erie Insurance represented the result of hundreds of hours of financial modeling, about a year of hard work by a lot of people and a confidence boost.

They plan to open the food hall in 2021. They want it to highlight Erie’s diversity — the community has a large immigrant population, thanks in part to refugee resettlement.

There will be seating for 192 people, and the space could be configured to host events. There will be a space for 10 vendors, plus a bar. They want to use some of the existing archways as vendor space to showcase the building’s history.

“It’s rare that you get buildings that are this beautiful,” Persinger said, “or have the potential to be this beautiful.”

Read the full article here.