GO Zone: Affordable Housing
By Wade
Ogletree
On March 28, 2007, the Times-Picayune
reported that "the House unanimously [had] passed legislation designed to
kick-start construction of affordable housing along the Gulf Coast where rents
have skyrocketed since the 2005 hurricanes wiped out supply." The legislation
gives builders more time to qualify for
favorable tax benefits. According to the papers, "Rep. William
Jefferson, D-New Orleans, said about half of his city's population had not
returned because of the housing shortage."
The paper went on to report that "About 82,000 rental units sustained
severe or major damage in Hurricanes Katrina and Rita, according to the
Louisiana Recovery Authority. Melancon said rents have risen 39 percent since
the storms."
On April 19th, WDSU
reported that "property owners and nonprofit organizations are set to
receive $202 million to repair and rebuild rental properties in south Louisiana."
Again, the program is designed to bring down spiraling rent-rates, with most of
the money earmarked for New Orleans.
Investors with an eye on the news should keep these factors in mind. A
market analysis in highly damaged areas cannot use existing rental rates for
projected income. (Not all GO Zone areas were equally affected. Nor
are rental rates level throughout the Zone.) Rates in these areas are high
due to low supply but the depreciation benefits and the "Road Home"
project of the WDSU report should increase supply to better meet demand,
That means that figures have to work with a lower rent rate. Consider the
price of the property, rental rates at a more normal level for the long-run, the
GO Zone depreciation (if you qualify), and, finally, resale value. Resale
becomes especially important if you hope to turn the property over in the next
three to seven years. (Those hoping to qualify for GO Zone depreciation
should be certain how long the IRS will require they hold the property.)
If you buy now when supplies are low, be sure you can resale for an acceptable
amount in the middle of or directly after a building boom. This dilemma
explains, in part, the need for the GO Zone depreciation, as it could more than
offset market difficulties.
The Picayune article quoted Rep. Jefferson as saying, "It is not because
residents do not wish to return, it is because many cannot afford to return.
The lack of quality affordable housing that is sustainable discourages the
return of a workforce and the restoration of the economy." To the
degree that Jefferson is correct, returning residents will offset the rising
supply with rising demand--but that will only happen once the rising supply has
driven rental rates down.
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