The GO Zone incentives are great — if you have the right kind of deal. But do enough developers have the right kinds of deals to really use the incentives? And how do they decide which incentive to use?
John England, an attorney with Butler, Snow, O’Mara, Stevens & Cannada, PLLC, Jackson, said the process of successfully developing a plan to optimize use of the incentives for a particular project includes identifying and understanding the following factors:
1. What is available from all sources (federal, state and local).
2. The existing status of the taxpayer and the nature of the potential project.
3. The short-term and long-term business objectives of the taxpayer.
“Businesses may utilize GO Zone incentives to support many types of commercial projects including hotels, office buildings, retail stores, restaurants and manufacturing facilities and equipment,” England said.
Butler Snow recently gave a presentation at a meeting of the International Council of Shopping Centers (ICSC) showing how the GO Zone incentives could be utilized for many different types of businesses within the GO Zone.
“These economic incentives are so significant that any business considering an investment in any new, replacement or expanded operations or facilities within the GO Zone should consider how to employ these incentives to the fullest extent possible,” England said. “As we discussed during our presentation to the ICSC, because of the time-sensitive nature of these major federal incentives, it is critical that taxpayers begin the planning process as soon as possible.”
There are some GO Zone issues that are unique to developers, said Louis Fuller , a member with Brunini, Grantham, Grower & Hewes PLLC, Jackson.
“For example, GO Zone bonus depreciation is only available for property that is used in the ‘active conduct of a trade or business’,” Fuller said. “It is sometimes difficult to determine whether rental real estate is a business or an investment. Also, to the extent the GO Zone bonus depreciation generates net operating losses for tax purposes, such losses are subject to the normal passive activity loss limitations that apply to real estate investors.”
The Go Zone bonus depreciation and tax exempt financing are mutually exclusive in the sense that property financed with GO Zone bonds is not eligible for the bonus depreciation. Fuller said the GO Zone bonus depreciation generates potentially large up front tax deductions.
“If the bonus depreciation deductions cannot be used in the current taxable year, net operating losses attributable to the bonus depreciation can be ‘carried back’ five years, generating refunds of tax paid in these prior years,” Fuller said. “These tax savings and refunds are designed to ease the burden of the up front cost of reconstruction or new investment. Bonus depreciation is most desirable for companies that have sufficient taxable income, currently or in the previous five years, to take advantage of the larger depreciation deductions. You also have to consider that future depreciation deductions will be smaller because half of the cost of the property is written off in the first year, and that if you sell the property prior to the end of its useful life, a portion of the bonus depreciation must be recaptured as ordinary income. It is sort of a pay me now or pay me later proposition.”
Fuller said the benefits of tax exempt financing are more long term in nature, because tax-exempt bonds generally command a lower rate of interest than taxable borrowings, reducing the taxpayer’s long-term cost of capital. These benefits are permanent. On the other hand, tax-exempt financing may be more cumbersome and expensive than conventional financing.
“Another consideration is that the types of property eligible for GO Zone bonus depreciation are broader than the types of property that may be financed with GO Zone bonds,” Fuller said. “GO Zone bonds cannot be used to finance movable equipment and fixtures.
“In general terms, which incentive is better requires a present value analysis taking into account the taxpayer’s current and prior situation, the length of time the taxpayer intends to hold the property and the length of time over which the taxpayer intends to finance the improvements.”
Businesses that have benefited the most from the GO Zone Act are existing operating businesses of almost all types, regardless of whether they previously operated in the GO Zone.
“These businesses have the greatest flexibility in getting full benefit from a wider array of the incentives available through the GO Zone Act and in integrating those incentives with other state law benefits,” said Thad Varner, an attorney with Butler Snow. “We have assisted businesses in utilizing GO Zone incentives to construct, rebuild, expand or improve manufacturing facilities, office buildings, retail stores, hotels, medical clinics and hospitals, warehouse facilities, restaurants and a variety of other businesses. In addition, incentives may be available for apartment complexes and other residential rental property, which meet certain requirements under the GO Zone Act. Finally, ratepayers in the GO Zone have benefited in terms of reasonable rates because their utilities have been able to utilize significant GO Zone benefits and incentives.”
The primary housing benefits have been through the Mississippi Home Corporation (MHC). According to Scott Spivey, MHC’s vice president for corporate communications, MHC has issued $157 million in GO Zone bonds through five separate issues. The eligibility requirements for borrowers under the Mortgage Revenue Bond Program have been broadened by the GO Zone Act. In addition, the Housing Tax Credit program administered by MHC now has received an additional $35.4 million for 2006, 2007 and 2008 over and above the $5-million annual allocation. Fifty million dollars is still available under the HTC program, which encourages the development of qualified affordable-income units by offering a credit or reduction in tax liability for owners and investors in affordable-income rental housing.
The GO Zone Act is modeled after the Liberty Zone incentives created after the 9/11 disaster and includes requirements which must be met to qualify and to take full advantage of the incentives.
“For example, a business which takes advantage of the 50% bonus depreciation may be subject to recapture provisions if the property is sold or otherwise ceases to be qualified GO Zone property,” Varner said. “In addition, use of the bonus depreciation deductions remain subject to the normal limitations found in the ‘at-risk’ and ‘passive activity’ rules of the tax code. It is critical that businesses develop a plan, on the front-end, to optimize the use of incentives for a particular project.”
Contact MBJ contributing writer Becky Gillette at email@example.com.