What’s working — and what’s not — with GO Zone provisions?
by Lynn Lofton
Published: March 26,2007
More than a year and a half since Hurricane Katrina visited the state, Mississippians are starting to see the effects of the Gulf Opportunity Zone Act of 2005. Crafted to encourage the rapid rebuilding of affected counties and parishes in Mississippi, Louisiana and Alabama, the legislation established bond provisions and tax incentives. The legislation was modeled after the Liberty Zone Act that was passed in the wake of the attacks September 11, 2001.
“The Liberty Zone Act was very limited in its geographic scope and the types of businesses that would likely take advantage of it,” said Louis Fuller, a member with Jackson’s Brunini law firm. “The geographic coverage and the varieties of businesses that may take advantage of the GO Zone incentives are quite unprecedented.”
In Mississippi, the act originally included 47 counties but Holmes and Humphreys counties were added after passage for a total of 49 counties. Some provisions of the legislation are working better than others. Several professionals interviewed by the Mississippi Business Journal said the most popular incentives are the tax-exempt GO Zone bond financing and the bonus depreciation benefit.
Don Clark, firm chairman of the Butler Snow law firm, thinks the tax-exempt bonds and the employee tax credits have worked extremely well. “The 50 percent bonus depreciation has proved to be a great incentive for existing operating businesses,” he said. “In addition, one incentive that should not be overlooked is the increased authority for new markets tax credits.
State incentives — ‘attractive’
“I would encourage all businesses considering the GO Zone not to forget that there are many attractive state incentives that can often be coupled with GO Zone incentives, in particular, the tax-exempt bonds offered.”
Banker Glenn Nash agrees that the bonus depreciation benefit is working well for small to mid-size businesses. “The feasibility level for GO Zone bond financing is too high for the majority of Coast businesses,” he said.
Nash is senior vice president and senior lending officer of the South Mississippi region for BancorpSouth Bank. The bank was involved in lobbying for the legislation at the highest level.
“We have had a number of customers take advantage of the bonus depreciation that comes from fixed asset investment in the three coastal counties,” he said. “Several of our Jackson and Hattiesburg area customers have taken advantage of GO Zone bond issues to repair or expand their facilities.”
He added that most of the activity in the coastal counties has come from replacing or repairing lost or destroyed equipment or buildings. While the bonus depreciation option is being used, Nash says he has not seen much GO Zone bond financing in the coastal area.
“I believe this is a function of our relative economic size and the fact that the borrowing level needs to be at the $2-million-plus level to make bond issuance feasible,” he said. “Our average loan size is much closer to $200,000, and small businesses are much more likely to take advantage of the bonus depreciation than the bond program.”
Pick and choose
Fuller points out that unfortunately the two popular incentives are mutually exclusive in the sense that property financed with GO Zone bonds is not eligible for the bonus depreciation.
“To date, it seems most people have been choosing the bonus depreciation,” he said. “This may be due in part to the fact that the expiration dates for this incentive will arrive sooner than the deadline for issuing the bonds. I believe most people expect that the bond financing will pick up after 2008.”
Ray Cornelius of the Adams and Reese law firm says these two provisions have increased interest in Louisiana tenfold.
“New projects are considering Louisiana and existing companies with future plans are constantly considering moving their time frames forward to escalate plans to avail themselves of the incentives currently available,” he said. “Louisiana will need more allocation of bonds and an extension of the bonus depreciation provisions beyond the current GO Zone Act provisions.”
Melanie Woodrick of GranthamPoole CPAs says the legislation is spurring construction of real property for businesses. “Many clients who have been renting office space have now decided to build their own building,” she said. “It also appears to have brought investors from outside the state into Mississippi to look for sound investments that will reap tax benefits.”
Mississippi has established procedures for allocating bond benefits under the GO Zone legislation, according to Bob Lazarus, an attorney with the Watkins, Ludlum, Winter and Stennis law firm.
“The legislation has provided an impetus for construction, and although the recovery has not occurred as quickly as anyone would have hoped, this legislation, together with other state incentives, has created increased interest and activity,” he said.
Lazarus says the incentives will only partially accomplish their intended purpose. He agrees with others that the tax-exempt bonding and bonus depreciation have encouraged development in areas that might not have otherwise experienced development.
“However, increased construction costs have made such projects more expensive, and the GO Zone only partially makes up for the difference,” he added.
Regions Bank has been active in educating clients on the economic incentives of the act and in holding seminars for the general public, said Cheryl Johnson, president for the Mississippi Gulf Coast area.
“We have also been active in providing letters of credit for the bond transactions issued through the provisions of the act,” she said. “Most of our clients have utilized the incentive that allows for a 50% depreciation of real property during the first year of operation. However, numerous clients have also used tax-exempt bonds to finance real estate developments.”
Contact MBJ contributing Lynn Lofton at email@example.com.
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