Partners (Number 1, 2007)

Vol. 17, No. 1, 2007


Innovative Approaches Help Solve N.O.'s Housing Woes

Achieving the American Dream: Are We There Yet?

Courting the Creative Class: New Strategies for Urban Revival

GO Zone Tax Credits and Incentives

The Subprime Mortgage Market

Case Making: Building a Pathway to Implementation

Spotlight on the District—Florida



GO Zone Tax Credits and Incentives

Hurricane Katrina, which wreaked an estimated $86 billion in damages across 90,000 square miles, ranks as the most expensive natural disaster in the history of the United States.

go zone logos

On the heels of Katrina came two more hurricanes—Rita, which affected the southwestern portion of Louisiana and Texas, and Wilma, which swiped southern Florida. In response to these devastating hurricanes, Congress passed a package of tax relief and incentives designed to jumpstart economic recovery by providing much-needed businesses and services in hard-hit areas.

The Gulf Opportunity Zone (GO Zone) Tax Incentives and Relief Act makes available almost $14 billion in federal tax incentives to encourage businesses to invest in the region. An additional award of $400 million in tax credits from the U.S. Department of the Treasury is expected in fall 2007. The GO Zone stretches as far north as Jackson and Columbus, Miss., and as far east as Tuscaloosa, Ala. In Louisiana, it includes not only New Orleans, but also Baton Rouge. The program extends to 31 parishes in Louisiana, 49 counties in Mississippi and 11 in Alabama.

Incentives aim to attract new investment
A recent series of information sessions about GO Zone incentives hosted by the New Orleans branch of the Federal Reserve Bank of Atlanta in January 2007 drew over 200 bankers, investors and other financial professionals from as far away as Canada. The IRS, the U.S. Department of Housing and Urban Development and the U.S. Department of the Treasury explained how financial institutions and their customers could benefit from the new legislation.

Because the tax credits are implemented by the IRS, it is difficult to quantify how many projects have been prompted by the program. However, Alabama's Governor Bob Riley has reserved up to $900 million in tax incentives and provisions under the GO Zone Act that will likely be used to attract a steel plant to Mobile. Louisiana is also contending for the plant. Other projects approved though bond allocations for Alabama include $2.6 million for the Demopolis Hotel and $35.9 million for Alabama Power.

Louisiana has won prelinminary approval for a $150 million film and digital studio in one of the areas of New Orleans seriously affected by flooding. This is the first Louisiana project that will be eligible for GO Zone tax-free bond financing. The studio would generate an estimated 2,000 temporary construction jobs and about 2,000 new permanent jobs with a payroll of $125.3 million. Other Louisiana projects that could benefit from the legislation are in the pipeline:

  • a $9 million new components factory for 84 Lumber Company in Hammond;
  • a $3.5 million new plant construction for Baumer Foods in La Place;
  • a $6 million new building systems factory for ABSI/Emmedue in Jefferson Parish;
  • a $65 million plant expansion for Dow Chemical in St. John the Baptist Parish;
  • a $715 million Hyatt Regency downtown revitalization project including a 20-acre multi-use center and park redevelopment in Orleans Parish;
  • a $200 million luxury residential, hotel and retail complex, Trump Tower, in Orleans Parish.

Challenges persist
Although much optimism surrounds the potential for new investment, two significant challenges could thwart businesses' ability to take advantage of the incentives. First, the credits and incentives are slated to expire in 2008. Because materials and skilled labor are scarce for construction projects as far away as Florida (which is still recovering two years later from Hurricane Ivan), New Orleans' prospects for rebuilding remain unclear and the "place in service" date of 2008 seems unrealistic if not impossible to achieve.

Secondly, insurance costs for commercial businesses have increased as much as 268 percent, severely cramping cash flow and profitability. Projects eligible for low- income housing tax credits typically maintain small operating margins and thus are not able to absorb the additional costs or volatility. Estimates indicate that as many as half of the allocated GO Zone credits are in jeopardy due to skyrocketing insurance costs. Recently delegations from the affected areas have been petitioning Congress to extend the credits through 2010, and the outlook is favorable.

This article was written by Nancy Montoya, regional community development manager in the Atlanta Fed's New Orleans branch.

What Does GO Zone Legislation Provide?

The GO Zone Act packages a basket of tax incentives and credits that have the potential to spur economic development and increase the production of affordable housing. Some of the significant measures are:

  • Expansion of low-income housing tax credits within the Zone. Allocation of low-income housing tax credits rose dramatically for 2006, 2007 and 2008. In Louisiana, for example, housing tax credits jumped to 10 times the annual amount per capita prior to the storms. In Mississippi they increased 6 times the annual amount per capita. The legislation further rules that in difficult-to-develop areas in the GO Zone, the credit can be calculated at 130 percent of the basis of the property rather than 100 percent.

  • Increase in the rehabilitation tax credit to help restore commercial buildings. GO Zone legislation raises the existing tax credit for rehabilitated buildings constructed prior to 1936 from 10 percent of qualified expenditures to 13 percent. The credit for certified historic structures increased from 20 percent to 26 percent. To qualify, rehabilitation expenses must be incurred between August 28, 2005 and December 31, 2008 and must meet guidelines related to structure, facades, brickwork and other requirements.

  • Additional bonding authority. To assist in the rebuilding effort, the bond authority granted to the GO Zone states has been raised by approximately $7.9 billion for Louisiana, $4.8 billion for Mississippi and $2.1 billion for Alabama. This special class of tax-exempt, private activity bonds called GO Zone Bonds may be used to finance acquisition, construction and renovation of commercial real property or residential rental property at an interest rate savings of up to 2 percent. The additional bonding authority expires after 2010.

  • A 50 percent bonus depreciation within the Zone. Through this incentive businesses can claim an additional first-year depreciation deduction equal to 50 percent of the cost of new property investments made in the Zone. The increased depreciation allowance applies to software, leasehold improvements, and certain equipment and real estate expenditures used in the active conduct of a trade or business. All depreciation deductions would be exempt from Alternative Minimum Taxes. This provision applies to property placed in service through 2007 or, in the case of real property, through 2008. (It should be noted that a business may choose tax-exempt financing or bonus depreciation, but not both.)

  • Enhanced expensing for small businesses. Under section 179, eligible small businesses may expense up to $200,000 of investment made in the Zone—up from $100,000—on investments between August 28, 2005 and December 31, 2007. Legislation lifted the phase-out floor for investment from $400,000 to $1 million through 2007.

  • Extension of net operating loss carryback. The net operating loss (NOL) carryback period is extended from two to five years for losses attributable to repair of existing investment damaged by Hurricane Katrina; business casualty losses due to Hurricane Katrina; moving expenses and temporary housing expense for employees working in areas damaged by Hurricane Katrina; losses created due to claiming the 50 percent bonus depreciation on assets placed in service within the GO Zone.

  • Demolition costs. Fifty percent of demolition costs paid or incurred before January 1, 2008 can be expensed.

  • Remediation expensing. Costs incurred prior to January 1, 2008 through qualified environmental remediation inside the GO Zone, including clean up of petroleum products, may be expensed. (Typically these costs must be capitalized.)

  • Expanded Work Opportunity Tax Credits (WOTC). The Katrina Emergency Tax Relief Act of 2005 (KETRA) allows employers to claim WOTC credits for hiring any employee in the GO Zone area who lived in the core disaster area between August 28, 2005 and August 28, 2007. Credit extends to 40 percent of the first $6,000 of qualified first-year wages paid to eligible employees.

  • Increased New Markets Tax Credits. $1 billion in New Markets Tax Credit authority for 2006 and 2007 is available for community development entities that serve disadvantaged communities in the GO Zone.

  • Increased Hope Scholarship and Lifetime Learning Credits. This provision doubles the Hope Credit dollar amount to a maximum of $3,000 and doubles the Lifetime Learning Credit to 40 percent, allowing a maximum of $4,000.

  • Additional provisions include relief for small timber owners, restructuring of outstanding debt to reduce cost to municipalities, and authorization of Gulf Tax Credit Debt Service Bonds.