Bill Fenstermaker, president of the Lafayette engineering firm C.H. Fenstermaker and Associates, is scouting locations to build a new million-dollar warehouse. He had always planned to build the warehouse, and the timing of the Go Zone tax benefits provided motivation to do it now. (In order to qualify for Go Zone incentives, new buildings must be completed and operating by the end of 2008.) Fenstermaker also notes that IberiaBank, for which he serves as chairman of the board, is now building 18 facilities in the Go Zone. All of these projects are poised to capitalize on a 50 percent bonus depreciation provision included in the Go Zone incentives.
"It's phenomenal legislation," says Fenstermaker.
In fact, almost any new commercial or rental real estate development or renovation that began after August of last year and will be complete before 2009 is poised to take advantage of the Go Zone Act's bonus depreciation.
Local developments that stand to benefit include Stirling Ventures' new retail outlet, estimated to cost more than $20 million, on Louisiana Avenue; a new $6.2 million Academy Sports store on Ambassador Caffery; and developer Robert Daigle's new multi-million dollar business center in River Ranch. Go Zone incentives are becoming so appealing that some businesses and investors are not only accelerating existing plans but also looking at new opportunities in south Louisiana.
"I've seen both," says Lafayette CPA Travis Brinsko. "I've seen people that have been renting [office space] for years that have made the decision, 'I can't pass up this opportunity to construct my own building and to be operating my business out of my own building with the benefits that the Internal Revenue Service is going to give us.' And I've also seen people that [had projects] on their plate, but they're going to speed up the process to ensure that they have it placed in service prior to the [Go Zone] deadline."
Hammy Davis, commercial Realtor with Coldwell Banker, says the incentives have sparked a land grab of sorts for commercial development property.
"We're selling a ton of lots as a result of the Go Zone," he says. He cites the St. Martin Economic Development Park on Highway 90 as a prime example; post-Katrina and Rita, Davis has sold 15 lots equaling 63 acres in the industrial park at a total price of more than $1.5 million.
"Americans are fixated with their federal income taxes," adds Davis. "When they hear they are going to be able to do something that they haven't been able to do before, especially with people who make money, it forces people to think like they've never thought before. The Go Zone has forced a lot of people to begin to think about expansion of facilities, building new facilities, investing in real estate, investing in new properties. It's an opportunity. It's very big."
According to the Congressional joint tax committee, Go Zone tax breaks will cost the federal government $6.2 billion in lost revenue over the next four years, and $3.1 billion in 2006 alone.
"It'll add billions of dollars of investment in Louisiana," Fenstermaker says. "You have an area that needs to rebuild, and obviously there'll be a lot of building going on there. Ours will be discretionary [In Lafayette]."
In addition to the bonus depreciation, The Go Zone Act gives Louisiana the authority to issue up to $7.9 billion worth of "Go Bonds" over the next five years. (Businesses are not allowed to use both Go Bonds and bonus depreciation.) Only a limited number of government and nonprofit projects normally qualify for tax-exempt bond loans, but the Go Bonds extend this opportunity to private business development. New business ventures, as well as qualifying residential rental developments, can take advantage of interest rates as much as 50 percent lower than the rates of traditional market loans.
Lafayette Economic Development Authority President Gregg Gothreaux says Lafayette is bound to see its share of the money.
"[Almost 8] billion dollars over five years is a lot of money," he says. "I believe eventually almost any project that wants to be financed using Go Zone bonds will be, but it may take some time."
For Lafayette attorney Jeff Speer, the Go Bonds came faster than expected.
Speer has been trying to achieve his dream of opening a deluxe hotel in the heart of downtown for the past seven years. After acquiring 55,000 square feet of land adjacent to the new federal courthouse, progress had been slow. But last year, things started coming together. Hilton Homewood Suites, a premier luxury hotel chain, accepted Speer as a franchisee. With banks offering him interest rates at around 8 percent, Speer publicly announced the project, hoping to be open for business by mid-2006. Then came hurricane season.
"The world really turned on us when Katrina hit," Speer says. "And then Rita hits. And the banks start waffling in their positions and, of course, if they're going to give you any money, it's going to be at such an exorbitant rate that it really doesn't make it profitable and it starts to kill the project."
Speer began to wonder how he would ever be able to finance his hotel.
"It was really difficult despite the fact that we were ready to roll before [the hurricanes] hit," he says. "Then all of a sudden we're blessed by this legislation and this money put in the bond commission."
Initially, Speer was told that his Lafayette hotel would have to wait in line behind a list of projects slated for areas with greater need, such as New Orleans and Lake Charles. Three weeks ago, he decided to go anyway to the state bond commission meeting and see the approval process for the first Go Bond projects.
Unbeknownst to him, his project was added to the docket.
"I walked in the room right as the state treasurer added the matter to the agenda orally," he says. "And people from the Department of Economic Development got up and began to advocate the project as being a wonderful thing for Lafayette and the entire state. Before I knew it we had a unanimous vote of approval, including the members who were from New Orleans. It was astounding. I'm still dumbfounded by it."
Through the Go Bonds, Speer's $20 million hotel will be financed with a low 4.5 percent interest rate. The difference in what Speers' loan payments will be now compared to a typical pre-Katrina 8 percent interest, 15-year loan: about $40,000 less per month, savings that total up to $6.8 million.
With his Go Bonds approved, Speer hopes to begin construction on the hotel this summer and is pushing to open by Mardi Gras 2007.
"Every day we're not open is a day we're not making money," he says. Speer predicts this is just the beginning of Go Zone-assisted projects to crop up downtown. He owns another half-city block on South Washington Street ' property some businesses, which he declined to identify, have already contacted him about developing.
"There's a lot of property down here that things can happen with," he says. "I know of several other projects that have been put on the side burner, waiting to see if [the hotel] successfully navigated the bond commission. So this little vote is going to mean a lot more than just this hotel. We're cutting a path, and I expect the line's going to form once that path's completed, and it's going to get deep."
With the buzz generated by the Go Zone, some market analysts are warning investors about being seduced by the tax incentives.
In his regular real estate column, Brian Andrews, president of Commercial Mortgage, wrote that he was confident the business community would play smart and consider long-term demand before rushing into new developments.
"I got so many e-mails from people saying, 'You Pollyanna. You give a real estate developer money, and he'll build. You let him build, he's gonna build,'" says Andrews. "And I just hope that's not true. I hope we learned some of our lessons from the '80s and that we won't overbuild to way beyond capacity."
Andrews says many businesses built offices beyond their needs based on the assumption they would be able to rent out excess space and add another source of revenue.
"There was a tremendous amount of new building in Lafayette in the '80s," Andrews says. "And it was an overbuilding because it was short-term demand, and then you've got all that excess capacity and that's why the market crashed. I'm hoping people have learned in the office market and in the retail market that you build based on a long-term need.
"I fear that people are going to get all excited about this," he continues, "and I just hope people don't make bad decisions." Andrews is advising clients to ensure that a business' basic operations turn profits and not to count on tax breaks to offset losses. "We have got to make money on a primary basis, and if the Go Zone helps us, let's have it help us make a better return."
So far, Andrews says much of the development he's seeing through clients in Lafayette and Baton Rouge is based on increased market demand. He also says Go Zone tax breaks can help nullify increased construction costs, which have risen approximately 10 percent since Hurricane Katrina.
LEDA's Gothreaux, doesn't see rapid growth from Go Zone incentives as a problem. "Overdevelopment is not a term that would fit Louisiana from a commercial standpoint," he says.
Jim Allen, a commercial lender with MidSouth Bank in Baton Rouge, says inherent checks and balances will prevent Go Zone financing from getting too risky. Go Bonds are underwritten by private banks.
"The banks are going to look at individual credits," he says. "If they feel like there's no market or the conditions aren't right, they're not just going to automatically rubber stamp the applications. I think the whole intent of Congress was economic development. You do have a lot of people that moved into Lafayette and Baton Rouge and Slidell, and there is a need for additional services, plus jobs. I think as long as the economics warrant the projects, it'll be OK."
Others believe there are potential pitfalls associated with the Go Zone incentives.
"There is so much in it that will give tax breaks to [out-of-state] folks who invest in Louisiana," says LSU tax law professor Susan Kalinka. "What happens when we get overly built and those projects go belly up?"
Kalinka also questions whether sweeping tax breaks are really the best way to spark economic recovery following a major disaster.
"Personally," Kalinka says, "my big concern about tax incentives is that often times federal grants could accomplish so much more and be targeted to those who could really use them rather than tax incentives. You've got to have a tax liability. And what about all these businesses that have gone bust? They don't have the finances to take advantage of the tax credits. So, Louisiana businesses aren't necessarily going to benefit from these provisions. It's going to bring out-of-state investment, which is good. But the little guys, their businesses went belly up."
At LEDA, where Go Zone incentives are becoming a major selling point to new investors, Gothreaux notes that it didn't take Go Zone tax incentives to get businesses and developers interested in Lafayette, which has experienced considerable growth over the past decade.
Following last year's hurricane season, business has been booming even more.
Since September 2005, total spending in the parish has been up an average of 25 percent over previous years. And Louisiana economist Loren Scott is now predicting Lafayette will gain 6,800 jobs over the next two years ' 4,000 more than he had predicted prior to the storm. That 5.3 percent increase in workers would be equivalent to the amount of growth Lafayette experienced from 1997 to 2005. Similar growth is under way in Baton Rouge.
LEDA has just printed glossy brochures highlighting Go Zone incentives to send out to interested businesses. The state Department of Economic Development also is spending $2.2 million to advertise the incentives in major business publications like Fortune magazine, hoping to attract out-of-state investment.
"We get Go Zone incentives inquiries every day, more than one," Gothreaux says. "Only the business community can answer how many of those translate into real projects. But the opportunity is here, and most business people in America understand it. I think we're in a good position because we're in between areas that were devastated, and it's well known that we're high and dry. I would say if you're considering an investment in the Lafayette and Acadiana area, now's the time to make it."
The easiest measure of the Go Zone Act for businesses to take advantage of is the bonus depreciation on new buildings and equipment. Taxpayers under the Go Zone Act can take a 50 percent bonus depreciation on their project's construction costs the first year the building is put in service.
For example, on a $10 million project, investors could depreciate $5 million on top of the standard $253,000 depreciation ' resulting in a $5.3 million deduction from the investors' taxable incomes that year. Any resulting loss in income can be carried forward to subtract from future earnings or carried back for rebates on taxes paid over the past five years.
The actual benefit an individual or business receives depends on their tax bracket. For wealthy investors, who pay up to 35 percent of their annual income in taxes, the bonus depreciation can translate into hundreds of thousands, or possibly millions, in savings.
The bonus depreciation only applies to new or newly renovated buildings that began construction after August 2005 and are put in service by the end of 2008.
For Realtors, the bonus can apply to newly built rental properties but not real estate built for sale. Casinos, liquor stores, racetracks, golf courses, massage, hot tub and sun tan facilities are ineligible.
Through 2007, businesses can also take advantage of bonus depreciations for new equipment purchased for use in the Go Zone. Under most conditions, a business purchasing a $500,000 piece of equipment to use in the Go Zone can depreciate $390,500 ' 78 percent of the cost ' in the first year.
Several conditions must be met. All buildings and equipment seeking bonus depreciation must be used "in the active conduct of the taxpayer's trade or business." This clause has sparked some disagreement between CPAs as to which commercial landlords would qualify.
Another condition for bonus depreciation is that "substantially all of the use of the property must be in the Go Zone." Many local CPAs are still trying to determine whether corporate trucks and boats that travel outside the Go Zone on business, but belong to companies based within the Go Zone, would qualify. Another looming question is whether the Gulf of Mexico will be considered part of the Go Zone.
"That's going to be huge in the oilfield service business," says Lafayette CPA Travis Brinsko. "Once you're outside the outer continental shelf, are they still going to consider that [equipment] substantially used in the Go Zone?"
LOW-INCOME HOUSING TAX CREDITS
Affordable housing was already a problem in Louisiana before hurricanes Katrina and Rita. One aspect of the Go Zone could help shore up that crisis. In a typical year, the Louisiana Housing Finance Authority would finance 30 low-income housing units statewide through federal tax credits. These range from rental apartments to single family housing complexes and include mixed-income developments. This year, they expect to quadruple that amount to 120.
Through the Go Zone Act, LHFA is being allocated $57 million more than it usually has over the next three years for tax credit financing of low-income houses. The tax credits, which are valid over 10 years, actually create $650 million in equity a year.
In order to qualify for the Go Zone tax credits, owners must rent out a certain percentage of their housing units at affordable rates to individuals who make from 40 to 60 percent of an area's mean income. In Lafayette, where mean income is about $51,500, this typically translates to monthly rents ranging from $400 to $750. The project must also adhere to several quality construction and maintenance standards.
Greg Gachassin, president of Meritas Mortgage and LHFA board member, says the added Go Zone tax credits are sorely needed for housing projects throughout the state.
"Pre-Katrina we had a housing crisis in Louisiana," he says, "and that's both for affordable housing and moderate income housing."
After Katrina, LHFA conducted a parish-by-parish study identifying these shortages. The report identified Lafayette as having a shortage of 5,411 affordable homes.
"Clearly, we're a booming parish," Gachassin says. "And I think when you have a booming parish, land costs are high, development costs are high, construction costs are high. It makes it very, very difficult to build affordable rental or ownership homes or apartments. That's the exact reason we need these kind of tax credits from the federal government so we can fill that gap."