Golf Opportunity Zone Bonds
The Gulf Coast region of the U.S. was hit hard in 2005 by several hurricanes including Katrina, Rita and Wilma. In response to the record devastation, the U.S. government passed the Gulf Opportunity Zone Act of 2005 (GO Zone Act). This legislation authorized special funding to help rebuild the Gulf Coast. President Bush signed the GO Zone Act into law on December 21, 2005 to provide assistance in the form of federal tax incentives and bond provisions to rebuild.
The GO Zone Act authorized several financing tools to help revitalize the Gulf Coast region including tax-exempt bond financing, low-income housing credits and several other financing tools. This fact sheet will focus on Gulf Opportunity Zone Bonds (GOZB).
Gulf Opportunity Zone Bonds
The GO Zone Act authorized the issuance of qualified private activity bonds to finance the construction and rehabilitation of residential and non-residential property located within the GO Zone area. The GO Zone Act provides for private businesses to borrow tax-exempt money to cover the cost of acquisition, construction, reconstruction or renovation of non-residential real property, qualified residential rental projects and public utility property in Alabama, Mississippi and Louisiana. The provisions of GO Zone Act vary by state, county (parish) and community effected.
GOZB encourage redevelopment through the issuance of tax-exempt bonds. GOZBs have other provisions to promote investment. GOZBs offer state and federal tax exemptions at interest rates lowers that through conventional financing, saving a borrower 1.50 to 2.00 percent. Interest earned on GOZBs is also excluded from the Alternative Minimum Tax (AMT).
Another benefit to the GO Zone Act allows borrowers to “share” issuance costs. The costs associated with bond issuance can be expensive. Financial institutions have pooled loan programs to allow borrowers to “share” the cost of issuance with other borrowers.
Other provisions of the GO Zone Act permits business to claim an additional first year depreciation deduction equal to 50 percent of the cost of new capital investments made within the GO Zone. The depreciation will be taken in lieu of tax-exempt financing and is exempt from the AMT. The depreciation does not require state approval and applies to properties redeveloped before January 1, 2008 or January 1, 2009 in the case of nonresidential real property and residential rental property.
GOZB are treated as either tax-exempt facility bonds or qualified mortgage bonds, depending upon the purpose issued.
Go Zone Area and Map
The GO Zone Act affects a large area including more than 20 parishes in Louisiana, 50 counties in Mississippi and 11 counties in Alabama.
The map below highlights the area protected by the GO Zone Act.
Source: U.S. Department of Housing and Urban Development http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/gulfmap.pdf Accessed 2/27/07
GO Zone Bond Guidelines
Bond proceeds maybe used to fund the construction and renovation of non-residential real property and certain residential rental property. However, GOZB proceeds may not be used for movable fixtures and equipment. Some of the eligible use of GOZB proceeds includes:
- Bond proceeds must be invested within the GO Zone
- Bonds must be issued after Dec. 22, 2005 and before Jan. 1, 2011
- Governor must approve issuance of bonds
- GOZBS are treated as either exempt facility bonds or qualified mortgage bonds
- Exempt facility bonds if 95 percent or more of the net proceeds of the bond sale are to used for qualified projects located in the GO Zone. Qualified project costs include the cost of acquisition, construction, reconstruction and or renovation of non-residential real property (including buildings and their structural components and fixed improvements); qualified residential rental projects (multi-family housing requires a affordable housing requirement. See below.); qualified mortgage issue projects (single-family housing requires meeting certain income tests) and public utility property.
- Qualified residential rental projects are projects by developers that produce market rate and affordable multi-family rental housing for low-income and very low-income households by reducing rental rates to individuals and families. GOZB will assist developers to acquire land and construct or rehabilitate units. While traditional bond financing for residential projects must pass a “20-50” and “40-60” test under present law to be considered qualified residential rental projects, under the GO Zone Act, a project is a qualified if it passes a “20-60” or “40-70” test. The “20-60” test applies when 20 percent or more of the residential units are occupied by individuals with an income of 60 percent or less of area median gross income. While the “40-70” test applies when 40 percent or more of the units are occupied by individuals whose income is 70 percent or less of the area median income.
- Qualified mortgage bonds if residences financed with bond proceeds are located in the GO Zone. Since they are in a targeted area the first-time homebuyer provision is waived, but income rules apply. Under the GOZB provisions 100 percent of the mortgages must be made to mortgagors whose family income is 140 percent or less of the median family income. In addition, GOZB proceeds allow for up to $150,000 in qualified home-improvement loan that may be financed with bond proceeds.
- New acquisition of existing property, improvements must be made to the property in an amount not less than 50 percent of the purchase price
- Can not finance movable equipment
- No more than 20 percent of issuance used for directly or indirectly acquiring land
- If acquiring existing building, must spend 50 percent on rehabilitation in 2 years
- Can not acquire property from related party
GOZBs can not be used for:
- Public and private corporations
- Commercial developers
- Utility companies
- Medical hospitals and clinics
- Manufacturing facilities
- Industrial parks
- Office buildings
- Bank branches
- Hotels and motels
- Physician buildings
GO Zone Bonds Volume Cap
The GO Zone Act set limits or caps on the amounts of private activity bonds based upon each state’s population according to the 2004 U.S. Census estimates. Communities with a higher concentration of residents per capita have more funding available to their disposal.
Alabama – Governor approval of $2.1 billion tax-exempt bonds
Louisiana – State Bond Commission approval of $7.9 billion tax-exempt bonds
Mississippi – Governor approval of $4.8 billion tax-exempt bonds
Louisiana Department of Economic Development http://www.gozoneguide.com
Mississippi Development Authority http://www.mississippi.org/content.aspx?url=/page/gulfzone&
Regions Morgan Keegan http://www.gozonebonds.com/
Phelps Dunbar GO Zone Guide http://www.phelpsdunbar.com/pages/hurricane/GO_Zone.pdf
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
- Golf course
- Country club
- Massage, hot tub or suntan facility
- Race track
- Liquor store
- Skybox or luxury box
- Moveable fixtures and equipment