October 15, 2018

Making Storm Recovery Possible with Tax Credit Programs that Work for Communities

For coastal regions of the U.S., hurricanes are the most severe and potentially devastating natural disasters those areas can face. As we saw last week with Hurricane Michael for the Florida Panhandle and beyond, families, businesses, and government officials have to brace themselves for potential devastation and then look towards a monumental rebuild in a hurricane’s wake.

The days leading up to a hurricane’s landfall require an unbelievable amount of preparation.  Massive evacuations often lead to loss of life; then, the storm itself creates life-threatening conditions for days and even weeks.  After the threat to life has diminished, the rebuilding of homes, communities and economies must begin.   How we rebuild and what we rebuild depends upon how much money is available and what types of financing tools developers can utilize to meet all the demands of rebuilding.

In August, we remembered one of the country’s most devastating storms, Hurricane Katrina.  Following the breach of the levee system in New Orleans, most of the city was under water; add in the fact that many communities on the Mississippi coast were impacted, and Hurricane Katrina remains the costliest storm in U.S. history at $150 billion.

The Congressional Budget Office estimates the annual cost of hurricanes at $28 billion per year with Florida, Texas and Louisiana accounting for the bulk of that amount.  Developers and advocates have worked closely and directly with Congress to develop programs, such as the Historic Tax Credit and the New Market Tax Credit to assist in the costly rebuilding that follows a storm.

Because the rehabilitation of a historic structure is costlier than building from the ground up, the Federal Rehabilitation Tax Credit provides an income tax credit to developers of certain types of properties.  In addition, several states have created their own programs that mirror the federal credit.  New Orleans, a city founded in 1718, has one of the top ten concentrations of historic structures in the United States.  The city encountered unbelievable complexities when contemplating and planning the rebuilding of so many historic structures.  The mantra of “build smarter and better” coupled with the number of public housing units damaged (5,000+ units) created an expensive and complex building process for developers and financiers.  The city would not have been able to recover without a combination of creative financing models, and the federal and state Historic Tax Credit programs played a vital role in the recovery of the city.

Another program that has had a profound effect on the rebuilding of communities after a storm is the New Markets Tax Credit Program.  This program incentivizes private investments in disadvantaged areas in exchange for an income tax credit and is arguably the most effective community revitalization tool available.  Like the Historic Tax Credit program, many states have created their own New Markets Tax Credits programs.   These programs are used effectively for commercial projects, housing projects, and by many non-profit organizations and cooperatives.  Community hospitals, food banks, and both public and private schools also utilize the credits as part of their financing model to get back on their feet after a storm.  When Congress stepped up with region-specific tax credit programs to spur rebuilding following the devastating storms of 2005, the Gulf Opportunity Zone Act included enhancements to the New Markets Tax Credit.  Proving its efficacy, the program generated an estimated $2 billion in economic activity throughout the gulf region.

The path of devastation left after a hurricane’s landfall is becoming deeper and wider, and the effects span from an individual household to an entire multi-state region.  Often, community leaders and elected officials do not have the financial proficiency and experience to contemplate full community recovery plans.  Stakeholders are learning to maximize historic tax credit and new market tax credit programs to foster smarter and more efficient rebuilding of communities, as both tax credit programs have a proven tract record of success and return on investment.

The team of professionals in Cornerstone’s coastal offices are experienced and ready to assist businesses, communities and other organizations that need assistance rebuilding after a hurricane or other weather disaster.