Partners (Number 1, 2007)
Partners (Number 1, 2007)
Vol. 17, No. 1, 2007
FEATURES Courting the Creative Class: New Strategies for Urban Revival
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.
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.
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.