Varying types of businesses are taking advantage of the tax-exempt GO Zone bonds, just one aspect of the Gulf Opportunity (GO) Zone Act of 2005 passed by Congress after Hurricane Katrina to facilitate the rebuilding process.
Michael Russ, a member of the public law and finance group at Butler Snow O’Mara Stevens & Cannada, PLLC, in Jackson, has closed several bond deals and induced many more in recent months for businesses ranging from shipbuilding to hotels, office buildings, retail shopping, doctor’s offices and manufacturing plants.
“We’re seeing manufacturing companies using the economic benefits of the bonus depreciation to help finance expansions or to upgrade their equipment,” said Paul Varner, leader of the tax group at Butler Snow. “In addition, many professional service firms are using bonus depreciation to help finance the construction of new or expanded office space. Due to the nature of the incentives and the fact that the state delegation, led by Sen. (Trent) Lott’s (R-Miss.) office, drafted this legislation to attract new business and assist recovering ones, these projects include business recovery, expansion and new construction.”
According to the Mississippi Business Finance Corporation, 116 projects have been induced, totaling $3.62 billion and creating 11,737 new jobs in the state. For Mississippi, the GO Zone bond allocation is nearly $5 billion in these tax-exempt bonds.
Private activity GO Zone bond allocation policies for Mississippi:
• Projects of $20 million or less will be taken on first-come, first-serve basis and will be subject to a limited review of the type of business that is seeking the allocation.
• Projects totaling $20 million to $200 million will be reviewed by the Governor’s Office on a case-by-case basis.
• Projects of more than $200 million may be limited to 50% of the total value of the project.
The maximum amount for any project is $250 million in the six southern-most Mississippi counties. All other counties in the Mississippi’s GO Zone are limited to $100 million in allocation per single project. All projects more than $20 million will be reviewed, and allocation will be determined based on location, number of jobs, payroll, total investment of the project and type of business.
“The tax exempt bonds and bonus depreciation incentives are very important, but some of the most vital GO Zone incentives include historic tax credits and New Markets Tax Credits,” said John Harral, a member of Butler Snow’s business services group in its Mississippi Gulf Coast office. “The GO Zone legislation increased the amount of historic tax credits to 26% of qualifying costs and increased the amount and the availability of New Markets Tax Credits for the GO Zone by billions of dollars. When those two types of credits are joined together, developers restoring older, historic buildings anticipate that up to 50% of their total restoration costs will be recovered in credits that result in immediate dollar-for-dollar tax savings, an extraordinarily powerful incentive for restoring historic properties. For downtown Gulfport, which lost a substantial portion of its inventory of historic buildings to Katrina’s wrath, the importance of this stimulus to saving and restoring the historic buildings that are left simply cannot be overstated. In the case of a $4-million to $5-million restoration, for example, as much as $2 million could be returned to the developer in tax credits. A powerful incentive indeed.”
Harral, who also serves as president of the Gulfport Main Street Association, said he’s aware of many projects that are in the final planning stages, which would not have been contemplated without these extra incentives.
“For example, buildings dating back to 1903 and the 1930s, some of the first buildings built in downtown, which were all but destroyed by Katrina, are right now being restored or architectural plans are being finalized, to open retail on the first floors, offices on the second and higher floors and apartments or condominiums on the top floors,” he explained. “We’re talking about hundreds of thousands of square feet and dozens of buildings. Downtown has struggled to achieve the vision of a vibrant mix of retail, office and residential for years prior to Katrina, and while the storm visited great destruction on downtown, it also created great opportunities. The Go Zone incentives will help make those opportunities and our long held vision of a revitalized downtown finally become reality.”
Downtown — and beyond
In addition to these credits, the GO Zone’s bonus depreciation is making an impact on rebuilding not only in downtown areas, but also throughout the coastal region. The bonus depreciation, perhaps the most generous bonus depreciation incentive ever allowed by Congress, will be utilized by developers and investors for projects ranging from mom-and-pop convenience stores to large apartment buildings to high-rise office buildings, manufacturing and industrial operations, Harral said.
“I remember explaining this incentive to a California developer looking at the tremendous opportunities in the post-Katrina Coast who practically fell out of his chair and had to stop me and make sure he was correctly understanding just how generous this incentive is,” he said. “Now, it’s not for every developer or for every project, but when the stars align with the right investor and the right project, it’s a very powerful incentive indeed and without question is attracting investment that would not otherwise have come to Mississippi.”
Mirroring the ‘Liberty Zone’
Bob Lazarus of Watkins Ludlam Winter & Stennis, P.A., in Jackson, said in almost all respects, the GO Zone Act mirrors the benefits provided by Congress in the “Liberty Zone” regarding the attempt to encourage economic development in lower Manhattan and the surrounding areas following the September 11, 2001, attack.
“The bonus depreciation benefit generally affords a property owner a special depreciation deduction for the taxable year in which such property is placed in service equal to 50% of the property’s adjusted basis, in addition to the regular depreciation deduction that can be taken for that year, after taking into account the lowered basis,” he said. “The value of such a depreciation deduction can be very large. For example, assume an office building costs approximately $50 million to construct and equip. If the owner is in the 35% marginal tax bracket, the value of the bonus depreciation deduction is $8.75 million (35% of one-half of the adjusted basis). The deduction can be carried forward, and can also be used to generate a refund for the previous five years as a special category of net operating loss.”
But there’s a catch, said Lazarus.
“The property subject to such bonus depreciation must be placed in service by the taxpayer on or before December 31, 2007, and in the case of nonresidential real property and residential rental property, December 31, 2008,” he noted. “For anyone who has constructed and equipped a commercial or industrial building, these dates are backwards. Consider the following: in order for equipment to be placed in service, which must be done by the end of 2007, the equipment will have to be housed in some structure that can be completed by the end of 2008. Common sense would dictate that a longer period would be given for the placed in service requirement for equipment, allowing time for the developer to complete its building and then equip the same.”
The “placed in service” requirements probably will not have a significant negative impact on smaller projects in the GO Zone that require a short construction or equipping schedule, said Lazarus.
“However, with respect to large structures, including office buildings, manufacturing facilities and large shopping areas, the law may be too restrictive for any reasonable use,” he pointed out. “Depreciation deductions are included in any business plan and a developer will want to know how much depreciation is available before starting any major project. Such a determination may well affect the size of a prospective project. Can a developer reasonably assume that there will be no delays in the construction or equipping of the project that will force the ‘placed in service’ date past the statutory deadlines? No. Therefore, as time marches on, the ability to use the bonus depreciation provisions of the GO Zone Act becomes more tenuous.”
Other questions remain. The term “placed in service” is subject to analysis on a case-by-case basis, said Lazarus.
“Consider the following: a manufacturer gets his equipment installed in late 2007, but the equipment must undergo operational testing prior to actually being used to produce a product,” he said. “Unless the equipment is actually being used for the purpose for which it is installed, it is likely that such equipment will not be subject to bonus depreciation. What happens if the installed equipment is defective and must be repaired? This could delay the placed in service date beyond the deadline and make the project a lot more expensive.”
Lazarus said serious consideration is being given to amending the GO Zone Act to accommodate these concerns and extend the bonus depreciation deadlines.
“At this time, however, it is not certain that such an amendment will be adopted or, if adopted, how much benefit will be provided for projects now under consideration,” he said. “It’s possible that only projects located in certain counties will be able to take advantage of any extension.”
If the bonus depreciation deduction is not claimed for real property improvements, such improvements may be financed with the proceeds of tax-exempt bonds. The deadline for the issuance of tax-exempt bonds is December 31.
Contact MBJ contributing writer Lynne W. Jeter at Lynne.Jeter@gmail.com.