GO Zone program lagging in New Orleans
GO Zone program lagging in New Orleans
June 21, 2009
by Kate Moran
Gulf Opportunity Zone bonds have proven a powerful economic development tool in many parts of the state, igniting such major industrial projects as the expansion of the Marathon refinery in Garyville.
Yet the program has gone all but unused in New Orleans since it was created in 2005. Stymied first by catastrophic floods and more recently by the collapse of the financial markets, developers have managed to tap only 4 percent of the bonds set aside for projects in New Orleans proper.
And their opportunity is about to expire. If developers do not claim a share of the financing by the end of the year, the G.O. Zone bonds dedicated for hotel, apartment, retail and other commercial projects in New Orleans will cycle back into a competitive pool, where businesses around the state can compete for them.
Congress created the G.O. Zone bonds to spur private investment in Louisiana after the devastating 2005 storms, but the incentive has proven a boon mostly in parishes that did not suffer the magnitude of damage that New Orleans did. While developers in the city have struggled to use the bonds, their counterparts in other parishes have all but exhausted the competitive pool, open to developers in 31 parishes.
The State Bond Commission tried to ensure that New Orleans got a fair crack at the financing by setting aside $1.3 billion in bonds, or about 16 percent of the total, for commercial projects in the city. Developers have managed to use only $55 million of that allocation over the past three years.
Several other projects in the city, including the Hyatt Regency, have been awarded bonds but have yet to place them with a bank or other investor. Even counting those projects, which must forfeit their bonds if they do not place them in the coming months, New Orleans has almost $770 million in completely untouched financing.
Bond attorneys, developers and city leaders said the bonds have sat unclaimed because it took months, even years, after the storm for developers to initiate projects as insurance rates spiked, labor costs soared and national banks were wary of investing in a city that has suffered catastrophic floods. As the recovery progressed, the collapse of the nation's credit markets all but sank developers' prospects for using the bonds.
G.O. Zone bonds do not represent a cash investment from government. As David Wolf, a bond attorney with the firm Adams & Reese, likes to say, the bonds are not "free money" for developers. They are instead an incentive that the federal government devised after Hurricanes Katrina and Rita to help developers across the Gulf Coast borrow money at reduced rates.
The investors that buy G.O. Zone bonds do not have to pay federal or state income tax on the interest they earn, and they generally pass on the savings to the developers borrowing the money. While the bonds are attractive to investors during a healthy economy, the market for debt instruments has been arid for the past year.
"These bonds need to be issued to a bank as part of a private placement, or they have to be marketed by an investment bank to a pool of investors. The appetite for the bonds is just not there right now," said F. Paul Simoneaux, an attorney with the New Orleans firm Elkins PLC.
A number of other federal incentives, including low-income housing, historic and new market tax credits, have helped developers build apartments and other projects around the city since Katrina. Another incentive Congress made available through the G.O. Zone legislation, called bonus depreciation, also has proven instrumental for some projects in New Orleans.
Walter Flower III, president of the city's Industrial Development Board, said the agency is seeking applications from large and small developments alike that might be able to claim a portion of the city's tax-exempt bond allocation before it rolls back into the larger, competitive pool at the end of the year.
"It would be a shame for local businesses not to take advantage of this incentive before the cutoff date," Flower said.
Developers with projects in New Orleans can continue to apply for G.O. Zone bonds even after the local allocation expires, though competition for the incentive will be tougher. Businesses in the 31 battered parishes that make up the Gulf Opportunity Zone will be jockeying for the incentive before the program as a whole expires at the end of 2010.
Mayor Ray Nagin's administration is lobbying for an extension of the program through 2015. In a recent letter in which he urged Gov. Bobby Jindal to support the effort, Nagin argued that the most devastated parishes needed more time to use the incentives. St. Bernard and Plaquemines also have unused bond allocations.
Julie Schwam Harris, director of intergovernmental relations for the Nagin administration, said City Hall also has prodded Congress to amend the tax code to make G.O. Zone bonds more attractive to banks and other investors. She said Congress could make the interest paid on deposits from the bonds tax-deductible, as it did with the so-called economic recovery bonds approved as part of the recent stimulus package.
"We feel that the city, which because of the extent of the flooding needed more time to get started, needs more time to keep using the G.O. Zone bonds, especially in light of the financial situation in the country and the world," Harris said.
For more information on the tax-exempt G.O. Zone bonds, contact the city's Industrial Development Board by calling 504.658.4242 or by clicking here.