Gulf Opportunity Zone Act of 2005
In response to the devastation of recent hurricanes Congress passed the Gulf Opportunity Zone Act of 2005 (The "GO Zone Act"). This Act offers support to individuals and businesses who were impacted by Katrina, Wilma and Rita. It also encourages businesses to participate in rebuilding and restoring damaged areas via tax and other financial incentives.
Gulf Opportunity Zone (Go Zone)
An Unprecedented Opportunity
The 2005 Atlantic hurricane season was a record period of activity in this country with 27 named storms and 14 hurricanes. Of the seven hurricanes that made landfall, six came ashore along the Gulf Coast, impacting all states from Texas to Florida. Hurricanes Katrina and Rita were particularly devastating to Louisiana and its coastal communities, mainly the New Orleans and Lake Charles areas.
Congress responded to this devastation and in December 2005 passed H.R. 4440, the Gulf Opportunity Zone Act of 2005 (the "GO Zone Act"), which provides support to individuals and businesses impacted by hurricanes Katrina, Rita and Wilma. The legislation also provides tax and other financial incentives for businesses participating in the rebuilding and restoration of the region.
In September 2005 Congress passed the Katrina Emergency Tax Relief Act of 2005 (KETRA), which created many tax code changes to benefit Hurricane Katrina victims and those taxpayers helping victims of the disaster. The GO Zone Act extends many of the KETRA provisions to the victims of Hurricane Rita and expands certain benefits to small businesses impacted by both storms.
This guide has been compiled by a group of experts in their respective fields to summarize the provisions of the GO Zone Act and to clarify many of the complex sections.
The intended users of this Guide are primarily the participants in the investment community working to rebuild and revitalize the Gulf Coast and those businesspersons with assets on the Gulf Coast who are positioned to benefit from the special tax incentives and financing opportunities. The scope of the presentation has been limited to such endeavors and does not include discussions on non-commercial real estate or public utility interests. With the exception of personal casualty losses, it also does not include discussion of the provisions specifically benefiting individuals, such as treatment of college tuition, retirement plan withdrawals or housing assistance, though IRS Publication 4492 is highly recommended for guidance on these issues.
The programs addressed in this Guide that support existing businesses include:
An enhanced net operating loss carryback that provides for a portion of the NOL that is a "qualified GO Zone Loss" to be carried back five years rather than two years.
The expanded ability to expense up to 50% of demolition and cleanup costs as well as more time to remediate and expense certain environmental cleanup costs
Employee retention and work opportunity tax credits
Expanded treatment of personal casualty losses
Financial incentives for new development and rehabilitation addressed in this Guide include:
Tax-exempt bond financing available for a limited time to private businesses for office buildings, warehouses, rental housing, manufacturing facilities, shopping centers, retail stores and many other private sector projects
50% bonus depreciation for new development
The increase in deductions for Section 179 depreciation of new and used personal property used in a trade or business and certain other eligible property
Rehabilitation tax credits to restore commercial buildings
An expanded amount of low-income housing tax credits
The essence of the program is simple: the government has established a series of financial incentives to promote investment by the private sector in Louisiana rather than embarking on a public building campaign financed solely with public funds.
The magnitude of the incentives available is unprecedented and the qualification requirements are being modified to make those incentives more readily available for a broader range of projects. As these changes unfold, it will be critical to consult financial, investment and legal experts to understand the details (see the directory on page 30).
Tax credits will continue to be used to promote housing and there is a particular emphasis on constructing new, mixed-income properties in the New Orleans area, at least initially.
Tax-exempt bond financing was previously limited to governmental issues or qualified private activity bonds but is now available to private interests for the development of office buildings, shopping centers, hotels, storage facilities, industrial properties and so forth. There are certain restrictions as to what can be built, and bond issuance must still be approved by the State.
It is important to note that this bond financing is not a pool of cash held in an account to be distributed. Richard D. Leibowitz of law firm Breazeale, Sachse & Wilson notes that the $7,839,750,000 of tax-exempt bonds to be issued in the State of Louisiana "simply reflects the issuing capacity in the State of Louisiana."
Leibowitz notes that this capacity "does not represent funds that are distributed by a tax-exempt issuing authority to a qualified borrower, and should not be construed as a grant or donation of funds."
A Word of Caution
The tax incentives and financing opportunities described in this Guide are intended as inducement for investors to make prudent investments in those communities that need to be rebuilt in the most heavily damaged areas in and around New Orleans and Lake Charles, and to expand the housing stock in communities whose populations have forever increased, such as in Baton Rouge, Lafayette, Denham Springs, Gonzales, and the communities on the North Shore of Lake Pontchartrain. With such inducements there is potential for a virtual explosion of development that could lead to overbuilding and an oversupply of product in the market if not kept in check. Such a scenario could undermine the benefits that the program was designed to promote.
The incentives will not keep an apartment complex full or a shopping center leased if supply has exceeded the demand in the market. Financing or investment incentives will also not turn a bad project into a good project. It will be up to all participants in the market- developers, lenders, governmental agencies- to show commitment to the intended goals of the programs and restraint when appropriate.
By Brian S. Andrews, CMB
Brian Andrews is president of Andrews
Commercial Mortgage in Baton Rouge.
Joint Committee on Taxation, Technical Explanation of the Revenue Provisions of H.R. 4440, the "Gulf Opportunity Zone Act of 2005," as Passed by the House of Representatives and the Senate . (JCX-88-05), Dec. 16, 2005.
IRS Document: Publication 4492 (1/2006), Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma.
Climate of 2005 Atlantic Hurricane Season, National Climatic Data Center, last updated 13 January 2006.