After Katrina, expanding tax credits helped the Gulf Coast rebuild affordable rental housing. It can work in Texas, Florida, and Puerto Rico, too.
In the aftermath of Hurricane Katrina, Congress passed one disaster recovery package with a special mission in mind. The bill was designed specifically to encourage developers to rebuild or create new affordable rental housing in the Gulf Coast. The plan worked: The 2005 act spurred millions of dollars in new investment in the recovery, creating or restoring tens of thousands of housing units for low-income families.
Congress hasn’t passed another similar disaster recovery bill since. Despite the damage wrought by Superstorm Sandy, efforts to put together the right grab-bag of tax incentives and community grants to rebuild affordably failed to materialize.
Now, twelve years after Hurricanes Katrina, Rita, and Wilma—and much deeper into a coast-to-coast affordability crisis—the nation has once again been smacked by three back-to-back hurricanes. Vulnerable families in Texas, Florida, and the U.S. territories face enormous housing needs. Congress has an imperative to act to make sure aid reaches them. Fortunately, there is a template to follow.
The Gulf Opportunity Zone Act of 2005 leveraged housing tax credits to draw the private sector into the recovery. The bill established three “Gulf Opportunity Zones” for the areas struck by Katrina, Rita, and Wilma, offering different categories of tax incentive for each. Housing needs in New Orleans in particular pushed Congress to work specifically on behalf of low-income renters.
“The Lower 9th Ward was pretty much wiped out,” says Beth Mullen, national affordable housing industry practice group leader at the accounting firm CohnReznick. “There was a need to rebuild housing. Congress temporarily increased the amount of tax credits that were available to rebuild in that disaster area. That was the first time the [Low Income Housing Tax Credit] program had been used specifically for disaster recovery.”
LIHTCs, the housing tax credit program responsible for most of the new affordable rental housing that is built in the U.S., served as a significant engine of the Gulf Coast recovery. Affordable-housing advocates worked together with members of Congress to assemble tools that would incentivize developers to build affordable units. For the Katrina GO Zone, this meant dramatically ramping up the amount of housing tax credits that were available.
The amount of housing tax credits that the federal government allocates to each state varies from state to state by population. Typically, the value of the credit hovers around $2 per state resident; in 2017, the value was $2.35 per head. But from 2006 to 2008, in the parts of the Gulf Coast states proscribed by the Katrina GO Zone, that value shot up to $18 per resident. These tax credits totaled up to $47 million for Alabama, $100 million for Mississippi, and $200 million for Louisiana. (Overall GO Zone aid for each state, including bonds, climbed into the billions.)
“The number of units produced with the Low Income Housing Tax Credits was in the tens of thousands in Louisiana,” says Michelle Whetten, vice president and Gulf Coast market leader for Enterprise Community Partners. “It was probably close to 10,000 units in Mississippi.”
The particulars vary between the hurricane GO Zones created for Katrina, Rita, and Wilma; Congress produced a smaller package for Texas and the Midwest following Hurricane Ike in 2008 and several severe storms. But they all shared some incentives that appealed to major investors. For example, banks can earn extra credit from federal regulators under the Community Reinvestment Act for investing in areas where the federal government has declared a natural disaster. (The CRA requires financial institutions to invest in the community where they catch deposits.) While there aren’t many big banks situated in zydeco country, a number of them decided to invest in Louisiana after Katrina in order to take advantage of the CRA bonus.
“In a lot of cases, those investors that bought those credits from those original [GO Zone] deals have come back because they had a good experience in both Louisiana and Mississippi,” Whetten says. “They’ve come back to do more, maybe not even with GO Zone credits but with regular Low Income Housing Tax Credits in years since then. They otherwise would not have ever considered an investment here.”
Two state agencies in Louisiana, the Louisiana Housing Finance Agency and the Louisiana Recovery Authority, created a model program that allowed developers to combine the expanded housing tax credits with Community Development Block Grant funds in strategic ways. Louisiana’s CDBG-LIHTC “Piggyback” Program spurred housing investment in a number of areas: mixed-income housing, workforce housing, permanent supportive housing, and deeply affordable housing (for residents making between 20 and 40 percent of area median income).
That program was so successful that, by May 2009, some landlords and think-tankers in New Orleans started to fret that there was too much subsidized housing in the city. So the state turned off the hose. As my colleague Brentin Mock explains, the state never came close to meeting the need for affordable housing, especially in New Orleans. Plus, the Piggyback Program was not an effective tool for restoring or rebuilding small-scale rental properties—the category of individually owned properties that make up a lot of the rental stock in New Orleans—to say nothing of owner-occupied housing.
There were other drawbacks to the Gulf Opportunity Zone Act. Congress included a number of deadlines in the original bill, the idea being that it would motivate states to get the money in place quickly. Properties using those credits needed to be built fast. But for developers and investors, especially those without a lot of experience working on the Gulf Coast, the challenges were steep, from anticipating insurance requirements to fielding construction workers to meeting flood-elevation requirements.
Those deadlines created a lot of uncertainty for investors, and affordable housing advocates had to push hard to move Congress to ease up.
“The deadlines ended up being completely unreasonable,” Whetten says. “We ended up having to get them extended by Congress three separate times in order for all of the tax credits to be able to be used.”
There are efforts in Congress today to extend benefits similar to the GO Zone package to areas struck by recent disasters. Rep. Tom Reed of New York introduced the National Disaster Tax Relief Act to provide aid to federally declared natural disaster areas between 2012 and 2015—a Superstorm Sandy package, more or less. “By introducing legislation that covers only this limited time period, Rep. Reed is leaving the door open for a member whose district was more recently impacted to extend these benefits through 2017,” says Emily Cadik, director of public policy at Enterprise Community Partners.
The question of tax reform hovers over any speculation about when and whether representatives in Texas or Florida will step up with a bill expanding tax credits for the victims of the three recent hurricanes. While the 9-page blueprint released by the Trump administration in September preserves the LIHTC program, the tax reform agenda could potentially limit the appeal of LIHTCs to investors, given plans to cut the corporate tax rate.
That Republican tax reform agenda is still many pages short of reality. Even the boldest GO Zone 2.0 program, one designed to address a number of affordable housing gaps in Texas, Florida, U.S. Virgin Islands, and Puerto Rico, would still leave many of the most vulnerable families living in the lurch for years to come. The victims of Hurricanes Harvey, Irma, and Maria can’t wait for Congress to riddle out the tax code before deciding to send help.