Hurricane Katrina aid goes toward luxury condos far from the storm zone
February 7, 2008
TUSCALOOSA, Alabama: With large swaths of the Gulf Coast region of the United States still in ruins from Hurricane Katrina, rich federal tax breaks designed to spur rebuilding are flowing hundreds of miles (kilometers) inland to investors who are buying up luxury condominiums.
About 10 condominium projects are going up near the University of Alabama’s football stadium, and builders are asking up to $1 million (€730,000) for units with granite countertops, king-size bathtubs and football-themed decor. While many of the buyers are ardent football fans not entitled to any special Katrina-related tax breaks, many others are real estate investors who are purchasing the condos with plans to rent them out. And they intend to take full advantage of the generous tax benefits available to investors under the Gulf Opportunity Zone Act of 2005, or GO Zone, according to Associated Press interviews with buyers and real estate officials.
President George W. Bush signed the GO Zone bill less than four months after Katrina struck. It was sponsored by Republican Senator Trent Lott, who lost his beachfront home in Pascagoula, Mississippi, and was modeled after the legislation passed to stimulate the recovery of lower Manhattan after the Sept. 11 terrorist attacks. The GO Zone, designed to stimulate construction in Mississippi, Louisiana and Alabama, was drawn to include the Tuscaloosa area even though it is about 200 miles (322 kilometers) from the coast and got only heavy rain and scattered wind damage from Katrina.
The GO Zone contains a variety of tax breaks, offering tax-free bonds to developers to finance big commercial projects like shopping centers or hotels. It also allows real estate investors who buy condos or other properties in the GO Zone to take accelerated depreciation on their purchases when they file their taxes. The condo deals are perfectly legal, and the tax breaks do not take money away from Katrina victims closer to the coast because the depreciation is wide open, with no limits per state. But the tax breaks are galling to some community leaders, especially when bureaucratic hurdles and disorganization have stymied rebuilding in some of the most devastated coastal areas.
“The GO Zone extends so damn far, but the people who need it the most can’t take advantage of it,” said John Harral, a lawyer in hard-hit Gulfport, Mississippi. Locals say Tuscaloosa was included in the GO Zone through the efforts of Republican Sen. Richard Shelby, who sits on the powerful Appropriations Committee. But Shelby aides said Tuscaloosa made the cut because it was classified as a disaster area by the government after Katrina, not because of the senator’s influence.Defenders of the GO Zone said the Tuscaloosa area needed the aid because of the hundreds of evacuees who remained here for weeks after the hurricane. “The senator believes that the GO Zone program, and others enacted since then to assist with the rebuilding efforts following the devastating 2005 hurricane season, have been extremely successful in accomplishing their goal,” said Shelby spokeswoman Laura Henderson. The GO Zone investor tax breaks are credited with contributing to the condo boom in Tuscaloosa. Andy Turner, a real estate agent who specializes in condominium sales in Tuscaloosa, estimates the GO Zone depreciation benefit has helped spur 10 percent of all recent condo sales in the city. Tuscaloosa real estate broker Richard Ellis said an investor contacted him about GO Zone property and wound up buying 30 condo units for about $180,000 (€131,858) each.
An investor could write off more than $155,000 (€113,545) of the cost of a $300,000 (€219,764) condo in the first year and use the savings to lower his taxes on other rental income, according to tax attorney Kelly Hayes. Dave Toombs, a California real estate investor, bought two new, upscale townhouses as investment properties. He said he hopes to use GO Zone tax benefits when he files his taxes. “If we qualify for the GO Zone it will be icing on the cake,” said Toombs. In hard-hit Slidell, Louisiana, not far from New Orleans, officials said a shopping center is being built using $8 million (€5.86 million) in tax-free GO Zone bonds.
“The GO Zone has helped. If someone is looking to come to this area, it’s a good tool for them to use,” said Brenda Reine, executive director of the St. Tammany Economic Development Foundation.
Yet state reports reviewed by the AP and interviews show that the most ballyhooed part of the GO Zone bill — $15 billion (€10.99 billion) in tax-exempt bonds — has had relatively little effect so far.
The three states have approved nearly $10 billion (€7.33 billion) in bond sales to spur investment, the AP found. But only a fraction of that — $2.8 billion (€2.05 billion) — has actually been issued in bonds, meaning most projects are still on the drawing board nearly two years after the storm.
“It is a joke,” said Tuscaloosa developer Stan Pate, who has nevertheless used GO Zone tax breaks on projects that include a new hotel and a restaurant. “It was supposed to be about getting people … to put housing in New Orleans, Louisiana, or Biloxi, Mississippi. It was not about condos in Tuscaloosa.”
On the storm-raked shores of Lake Pontchartrain in Slidell, Louisiana, Chad Mayo, a pawn shop operator whose business was flooded by Katrina, asked: “The GO Zone? What’s that? We’re in the dead zone.”
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