When Hurricane Katrina made landfall in southeastern Louisiana Aug. 29, 2005–a decade ago–it became the costliest natural disaster in United States history and killed more than 1,800 people. The hurricane–and inadequate preparations for it–did horrific damage to the entire region, but low-income communities suffered the worst, many of whom are still suffering today. However, amid the destruction, the storm spurred heroic rescue and recovery efforts. And it produced a game-changing use of tax credits to redevelop areas hit by natural disaster.

That part of disaster recovery–expanding the federal low-income housing tax credit (LIHTC), new markets tax credit (NMTC) and historic rehabilitation tax credit (HTC) in disaster-stricken areas–continues 10 years after the nightmare of Katrina.

Katrina Brings GO Zone

With quick action from a Republican Congress just four months after the disaster, President George W. Bush signed H.R. 4440, the Gulf Opportunities Zone Act of 2005 (GO Zone). The bill provided a number of measures to encourage the cleanup and rebuilding of the areas devastated by Hurricane Katrina, as well as regions damaged by hurricanes Rita and Wilma, which hit the U.S. in the two months after Katrina.

The GO Zone legislation increased LIHTCs to an amount equal to $18 per capita (based on pre-disaster census data) for the presidentially declared disaster areas for each year from 2006 to 2008, granting Louisiana an extra $1.7 billion, Mississippi an extra $1.06 billion and Alabama an extra $470 million in LIHTCs. Texas and Florida also received an additional $35 million in total tax credits. The GO Zone areas were designated as difficult to develop areas (DDAs), which meant they received a 130 percent eligible basis boost, but were not included in the 20 percent cap on designated DDAs nationwide.

In addition to the LIHTC provisions, the act contained extra tax-exempt bond authority and incentives for bonus depreciation, as well as boosts for HTCs and NMTCs in the GO Zone:

• The percentage of the credit for qualified rehabilitation expenditures for non-historic properties jumped from 10 percent to 13 percent, and for HTCs, it went from 20 percent to 26 percent.
• An additional $600 million in NMTC allocations were granted to the GO Zone for 2005 and 2006, with a $400 million jump for 2007.

The Internal Revenue Service (IRS) also changed its regulations to allow those displaced to be eligible in LIHTC properties nationwide, which meant that thousands of households were able to quickly find a new home. It was a landmark time for the housing and development credits, highlighting the value of the programs to encourage investment in rebuilding distressed regions.

Incentives Spur Serious Development

While precise data on how much investment was made in LIHTC, NMTC and HTC properties in the GO Zone is not publicly available, this much is clear: There was a dramatic jump. After all, with $1 billion in NMTC allocation, $3 billion-plus in LIHTCs and the 30 percent increase in the HTC percentage, there was a robust set of community development tax incentives to invest in the damaged areas to help with the recovery.

And it worked: a 2010 report by the U.S. Government Accountability Office (GAO) said that by June 2009–45 months after Katrina–about 23,000 rental units in the GO Zone were funded through LIHTC equity. That number continued to grow in subsequent years.

One LIHTC property that used the GO Zone boost was the Louisiana Freedmen Homes, an affordable housing development whose developers were on the verge signing a financing agreement when Katrina struck. Construction costs skyrocketed in the wake of the hurricane, which made the previous financing no longer viable, but the builders were allocated GO Zone LIHTCs and the development went forward. Construction on the 15 buildings took place off-site and assembly occurred in New Orleans. The 29-unit structure was the first large-scale development in New Orleans using modular construction and now houses low-income families.

It had plenty of company, including the most noted New Orleans affordable housing redevelopment: the “Big Four” public housing sites–St. Bernard, B.W. Cooper, Lafitte and C.J. Peete–which were demolished after a unanimous vote of the city council following Katrina. They were redeveloped as new mixed-income properties through a combination LIHTCs and HOPE VI financing.

Meanwhile, the Broadmoor Education Corridor development in New Orleans benefited from both the NMTC and HTC GO Zone boosts–just one example of many. It will ultimately include a new Tulane University-supported community health center that serves 1,300 patients annually. Broadmoor already has seen the opening of charter school; a library and community center; and an arts and wellness center as it creates an identity as an education hub in New Orleans.

Legislation Inspired by GO Zone

While the GO Zone legislation was significant to the areas hit by Hurricane Katrina, its legacy is much larger as it has been used as a model for a series of similar legislation in the years the followed.

On Oct. 3, 2008, at the dawn of the Great Recession, President Bush signed the Emergency Economic Stabilization Act of 2008, which featured provisions modeled after the 2005 legislation. It provided tax relief for the victims of the Midwestern flood disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, as well as areas in Texas and Louisiana that were affected by Hurricane Ike.

As natural disasters continued to wreak havoc, the federal government continued to make adjustments in the tax credit programs to encourage investment and development. During 2012, the IRS issued a series of notices to grant relief from compliance for qualified LIHTC developments in states affected by Hurricane Sandy, Tropical Storm Lee, Hurricane Irene and other severe storms. Subsequently, the IRS released Revenue Procedures 2014-49 and 2014-50 which provide guidance about temporary disaster relief for qualified developments financed with LIHTCs or tax-exempt bonds.

A Broader Application

Now, Congress is examining something more sweeping. The National Disaster Tax Relief Act of 2015 was introduced in both houses of Congress July 16 to provide relief for major disasters declared from 2012 through 2015. It includes a provision to increase the state housing credit ceiling by the greater of $8 multiplied by the population of the qualified disaster area or 50 percent of the state housing credit ceiling. The legislation also calls for an NMTC allocation increase of $500 million to community development entities (CDEs) serving any covered federally declared disaster area for each calendar year. Meanwhile, the federal HTC would grant the 13 and 26 percent HTC rate for non-historic and historic properties, respectively, within federally declared disaster areas.

The legislation includes presidentially declared disasters or areas where the Secretary of Agriculture declared a natural disaster due to damaging weather and conditions related to Hurricane Irene or Tropical Storm Lee. Nearly all natural disasters declarations affect just a portion of the state, but consider this: Since the start of 2012, natural disasters have been declared in 49 states and four territories. Only Idaho, Puerto Rico and the Virgin Islands weren’t affected by natural disasters, which would mean at least an extra $3.75 billion in LIHTC allocation (using the 50 percent disaster allocation increase).

In the decade since Hurricane Katrina, we’ve seen the greatest national recession in 80 years and myriad natural disasters. But we’ve also seen that using tax credit programs to address recovery is one of the most efficient ways to encourage investment and development in areas as they recover. This is a testament not only to the programs’ flexibility and adaptability, but their records of achievement.

Although it is clear that the region still needs to recover, the legacy of Hurricane Katrina certainly must include some mention of how it spurred the creative use of tax credits in disaster-damaged areas and how it established tax credits as a key disaster recovery tool.