Key Katrina aid goes toward football condos

TUSCALOOSA, Ala. -- With large swaths of the Gulf Coast still in ruins from Hurricane Katrina, rich federal tax breaks designed to spur rebuilding are flowing hundreds of miles inland to investors who are buying up luxury condos near the University of Alabama's football stadium.

About 10 condominium projects are going up in and around Tuscaloosa, and builders are asking up to $1 million per unit.

While many of the buyers are Crimson Tide alumni or 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.

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 interviews with buyers and real estate officials.

The GO Zone contains a variety of tax breaks designed to stimulate construction in Mississippi, Louisiana and Alabama. It offers 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 GO Zone was drawn to include the Tuscaloosa area even though it is about 200 miles from the coast and got only heavy rain and scattered wind damage from Katrina.

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 red tape and disorganization have stymied the rebuilding in some of the devastated coastal areas.

"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."

Locals say Tuscaloosa was included in the GO Zone through the efforts of Republican Sen. Richard Shelby, who is from Tuscaloosa, graduated from Alabama and 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.

Dave Toombs, a real estate investor from Irvine, Calif., with no connection to Alabama, bought two new, upscale townhouses at The Traditions, just minutes from campus, 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, who is consulting with an accountant because the rules are complicated. "It's another plus check to put in the column."

An investor could write off more than $155,000 of the cost of a $300,000 condo in the first year and use the savings to lower his taxes on other rental income, according to Kelly Hayes, a tax attorney who advises investors in Southfield, Mich. Without the GO Zone tax break, the depreciation benefit from a single year on such a property would typically be just $10,909.

(The tax break is not available to people who buy a home for their own use.)

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 from Birmingham contacted him about GO Zone property and wound up buying 30 condo units for about $180,000 each.

The Congressional Budget Office estimated that the GO Zone bonds and accelerated depreciation would cost the government $3.5 billion in revenue from 2006 to 2015.

President Bush signed the GO Zone bill less than four months after Katrina struck. It was sponsored by GOP Sen. Trent Lott, who lost his beachfront home in Pascagoula, Miss., and was modeled after the legislation passed to stimulate the recovery of lower Manhattan after the Sept. 11 attacks.

The GO Zone covers 49 counties in Mississippi, 31 parishes in Louisiana and 11 counties in western Alabama.

Originally set to expire next year, key benefits under the bill were extended to 2010 in the hardest-hit areas of Mississippi and Louisiana as the recovery lagged. Many of the benefits expire next year in Alabama, and that prospect has helped spur the construction surge.

The White House and state officials say the economic package has been vital to helping with the cleanup and rebuilding after Katrina and Hurricane Rita. Tens of millions in tax-free bonds have gone for affordable housing for hurricane victims, officials say.

In hard-hit Slidell, La., not far from New Orleans, officials said a shopping center is being built using $8 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 in tax-exempt bonds -- has had relatively little effect so far.

The three states have approved nearly $10 billion in bond sales to spur investment, the AP found. But only a fraction of that -- $2.8 billion -- has actually been issued in bonds, meaning most projects are still on the drawing board nearly two years after the storm.

Mayor Chipper McDermott of Pass Christian, Miss., yearns for a GO Zone boost in his hard-hit Gulf Coast town.

"Everybody here is fighting every day just to get the life back in their towns," he said. "We're not looking at the rosebuds. We're in the thorns."

On the storm-raked shores of Lake Pontchartrain in Slidell, 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."