Baton Rouge is no longer in the GO Zone. Or is it?
The Gulf Opportunity Zone is a catch-all term for a package of federal economic incentives approved after hurricanes Katrina, Rita and Wilma in 2005. In Louisiana, rules and deadlines varied, depending on how hard your parish was hit. While the program largely ended in the Baton Rouge area at the end of 2008, local investors could have another shot at the end of this year.
Three aspects of GO Zone made a noticeable impact on new development in the Capital Region: “bonus” depreciation, tax credits and bonds. The first allowed for accelerated depreciation deduction equal to 50% of a new investment property. New offices, hotels or apartment buildings ready by Dec. 31, 2008, were eligible.
GO Zone-provided affordable housing tax credits were utilized by 15 Baton Rouge-area projects, counting two that haven’t closed yet. The Louisiana Housing Finance Authority ran out of the credits in December 2008, LHFA spokesman Jeff DeGraff says. Some of the credits could be returned or recaptured, but it would be hard to reallocate those credits because all GO Zone projects have a “placed in service” deadline of December 2010, DeGraff says. Only Congress can change the deadline.
The GO Zone bond story is a bit more complicated. After 2005’s storms, Congress approved about $7.9 billion in tax-exempt bonds, which were initially doled out on a first-come, first-served basis. Former Gov. Kathleen Blanco changed the rules when it became clear that some of the hardest-hit areas wouldn’t have a chance to take advantage of the program, and attempted to strike a balance between helping rebuild communities while alleviating some of the housing and job needs in places that gained population. Eleven parishes ended up with their own bond pools, while another 18 south Louisiana parishes [like East Baton Rouge] were left to fight over the “competitive” pool.
As of Jan. 22, the competitive pool was pretty much tapped out: 100% had been allocated, and about 80% of what was authorized had been closed and issued, State Bond Commission Director Whit Kling said. But a few parishes still have some left. Orleans, with an economy still struggling to rebound and financing for projects tough to come by, has closed on only about $55 million of nearly $2 billion in available bond capacity, Kling says.
As the rules stand now, any bond money reserved for certain parishes unclaimed on Jan. 1, 2010 goes into the competitive pool, giving Louisiana investors a chance to grab it before the program shuts down completely at the end of 2010.
“The benefit to Baton Rouge has been much greater than anyone would have expected, assuming that the projects that would have risen to the top would have been in the most impacted areas,” says Adam Knapp, president and CEO of the Baton Rouge Area Chamber. “We have actually done extremely well as a region.”
Which raises the question: Why should the Capital Region receive GO Zone money in the first place? Katrina and Rita largely spared Baton Rouge. If anything, didn’t the local economy actually benefit from the storms?
“South Louisiana’s economy in general was hit hard,” and the GO Zone benefits were meant to jump-start the economy of the entire state, he says. The state was cautious in setting up the program, making sure the hardest-hit parishes had their chance, then letting the rest of the state step in if needed to keep Louisiana from losing the benefits entirely.
“It’s been extremely fair,” Knapp says. Some significant local projects to benefit from GO Zone bonds include II City Plaza, Perkins Rowe and the Coca-Cola distribution facility.
“I don’t think the bond program made as much of an impact as people thought it might have,” says Brian Andrews of Andrews Commercial Mortgage. In the early days of the program, conventional wisdom said GO Zone bonds might be worth the upfront cost for any project more than $2 million because the interest rate would be significantly cheaper than market rate bonds; as market rates came down, GO Zone bonds didn’t make much sense unless the project was worth $10 million or more, Andrews says.
Thanks to GO Zone, the state had far more affordable housing tax credits available than it normally would have, but most were targeted for the eight parishes that saw the most housing damage from 2005’s storms, says Hunter Botz, vice president for the southern region of the National Equity Fund. The largest local project is the Townhomes of Sherwood Forest, a 98-unit development at Greenwell Springs Road and North Sherwood Forest Drive. Botz says he would have liked to see more housing credits awarded here, but acknowledged it’s hard to argue with putting money into devastated areas.
“It wasn’t a big competitive thing like sometimes takes place between New Orleans and Baton Rouge,” he says. “Ultimately, I think it all kind of evened out.”
There’s no way to track how much impact the accelerated depreciation had on the region, but it’s safe to assume the recent building flurry was at least prodded by the benefit. While the bonds drove the biggest projects, Wesley Moore, a commercial real estate appraiser, broker and consultant, says the depreciation benefit was far broader. Moore’s firm just moved into a new office off South Sherwood Forest Boulevard.
“GO Zone was a major factor for us, and we’re just 16 people and 5,000 square feet,” he says. “We decided if we were ever going to make the move to nicer, brand-new space, that was the time to do it.”
In spring 2008, Moore thought GO Zone had inspired overbuilding of apartment complexes. So far, he says that hasn’t been the case, perhaps because difficulties getting mortgage financing is keeping more people than usual in apartments.
But as Andrews warned in 2006, incentives don’t magically turn a bad project into a good project, and depreciation benefits won’t keep an apartment building full or a shopping center leased. And time will tell whether the spate of GO Zone-inspired building reflected real, or just perceived, needs.