COVER STORY, MAY 2006

PUTTING THE GO IN GO ZONE
Tax-credit bonds across Louisiana, Mississippi and Alabama to spur reconstruction and development.
Daniel Beaird

Hurricane Katrina hit land last August and permanently changed the way the Gulf Coast region’s population lived and conducted their business. Two weeks later, President George W. Bush proposed the Gulf Opportunity (GO) Zone Act of 2005. The act, which was signed into law last December, is designed to reinvigorate the Gulf Coast economy by increasing business expensing, accelerating bonus depreciation, providing expensing for demolition and clean-up expenses, and providing net operating loss carry-backs. Tax-exempt financing provided in the act is usually limited to governmental agencies and non-profit organizations. However, the GO Zone Act includes a wide range of businesses eligible for tax-exempt financing including public and private corporations, retailers, commercial developers, utilities and hospitals. The victims of Hurricanes Rita and Wilma in Texas and Florida were also provided similar GO Zone Act legislation.

The GO Zone Act creates a new category of tax-exempt bonds to finance the construction and rehabilitation of residential and non-residential property located in the GO Zone. The two types of GO Zone bonds include exempt facility bonds and qualified mortgage bonds. These bonds use 95 percent or more of the proceeds for qualified project costs within the affected region, which extends across Louisiana, Mississippi and Alabama. The total amount that can be issued to these three states is $2,500 multiplied by the population of the affected counties of each state. According to 2004 U.S. Census estimates, tihs equals to approximately $7.9 billion for Louisiana, $4.8 billion for Mississippi and $2.1 billion for Alabama. The authority to issue GO Zone bonds expires after 2010. However, the act also provides the states and municipalities with one additional advance refunding before January 2011. The additional authorization is as high as $4.5 billion for Louisiana, $2.25 billion for Mississippi and $1.125 billion for Alabama. “With over $15 billion available in tax-exempt, private facility bond financing available, there will be development, and with the short fuse on the use and placement of funds, it has created a hyper-development market context. The development interest is deep and cuts across multiple industry sectors." says Paul Richard of NAI Latter & Blum in New Orleans. “The Katrina impacted area is an urban planning laboratory that will test the limits of new urbanism, smart growth and post-modern design.”

“When it is all said and done, Louisiana will be better and stronger as a result of this legislation,” says Verni Howard, senior vice president of Regions Bank in Baton Rouge, Louisiana. “Louisianans now have hope.”  

“Because Hurricane Katrina impacted such a large portion of Mississippi, we are pleased that the incentives cover so many counties and communities,” says Leland Speed, executive director of the Mississippi Development Authority.

“The state department of Alabama sent out a questionnaire to gauge the level of interest for the financing option,” says Will Davenport, a representative with Morgan Keegan in Birmingham, Alabama. “They received requests back in excess of $20 billion, more than 10 times the amount allocated to Alabama.” So the demand is definitely strong, even in the state of Alabama, the least affected of the three Gulf Coast states.

Under the exempt facility bonds, qualified project costs include those for acquisition, construction, reconstruction and renovation of non-residential real property and public utility property such as gas, water, electric and telecommunication lines. Eligible projects in all three states may include, but are not limited to: retail stores, warehouses, manufacturing facilities, industrial plants, office buildings, bank branches, hotels and motels, restaurants, physician office buildings, medical hospitals and clinics. Qualified project costs also include the cost of qualified residential rental projects. A qualified residential rental project consists of a property in which 20 percent or more of its residents make 60 percent or less of an area’s median gross income; or 40 percent or more of its residents make 70 percent or less of an area’s median gross income. GO Zone bonds expand access to low-income housing by allowing states to allocate volumes of additional housing credit amounts from 2006 to 2008 by $18 per person in the GO Zone. In comparison, this amount is nine times larger than the previous law allocation of $1.90 per person. 

When using the bonds to acquire an existing facility, an investor must make expenditures for rehabilitation of the property equal to at least 50 percent of the proceeds used to acquire the property. Also, the Katrina GO Zone, the Rita GO Zone and the Wilma GO Zone will be treated as difficult development areas, which will allow investors to increase credits for a project from 100 percent of qualifying project costs on an amount equal to 130 percent of new construction or rehabilitation expenditures. The rehabilitation tax credit to help restore commercial buildings has also been increased from 10 to 13 percent of qualified expenditures incurred for rehabilitated buildings through 2008. For historic structures, this credit was increased from 20 to 26 percent. “The opportunity for development in the eight rural counties within the GO Zone in Alabama is fantastic,” Davenport says. “We have received approximately $70 million in financing requests just within those rural counties. The opportunity for new development in those rural counties is like it has never been before.”

With the possibilities for development ranging from hotels to retail to multifamily properties, interest is strong. However, GO Zone bonds cannot be used for financing movable fixtures and equipment to ensure that property financed with the bonds remains in the GO Zone. The bonds also cannot be used for race tracks, golf courses, massage parlors, liquor stores, tanning facilities, hot tub facilities, casinos or country clubs.

For damaged businesses in the GO Zone, the act allows a 50 percent bonus depreciation to help the rebuilding efforts of business property that is placed in service before 2008, and non-residential real and residential rental property that is placed in service before 2009. This permits businesses to claim an additional first-year depreciation deduction equal to 50 percent of the cost of new property investments. To qualify for this bonus depreciation, a GO Zone property must meet four requirements. First, it must be one of the following types of property: property to which the general Modified Accelerated Cost Recovery System (MACRS) rules apply and has a recovery period of 20 years or less; computer software to which the general MACRS rules apply; qualified leasehold improvement property to which the general MACRS rules apply; non-residential real property; or residential rental property. Second, substantial use of the property must be in the GO Zone and must be in active conduct of a trade or business within the GO Zone. Third, the original use of the property began on or after August 28, 2005. And finally, the property was acquired on or after August 28, 2005, but only if no written binding contract for the acquisition was in effect before August 28, 2005. If a business elects the depreciation benefit, neither application nor approval by the state is necessary. However, recapture rules apply if the property ceases to qualify as GO Zone property.

Small businesses see an extra benefit as the GO Zone Act permits eligible small businesses, those with less than $400,000 of annual investments, to expense up to $200,000 for investments made in the GO Zone. Prior to the hurricanes, small businesses were only allowed to expense up to $100,000 of qualifying investments. The act has also increased the phase-out floor for small business from $400,000 of annual investments to $1 million of annual investments in an effort to protect expensing available to small businesses if they have extraordinary investments due to hurricane rebuilding costs in 1 year.

Another benefit for GO Zone businesses is the extension of the net operating loss (NOL) carry-back period from 2 to 5 years for losses attributable to new investments and repairing existing investments in the areas damaged by the hurricane; business casualty losses caused by the hurricane; and moving expenses and temporary housing expenses for employees working in the GO Zone. Also, taxpayers with casualty losses associated with public utility property caused by the hurricane may elect to either carry-back an NOL attributable to certain casualty losses 10 years; or treat certain casualty losses as having occurred 5 years prior to Hurricane Katrina.

“The GO Zone Act is positive news for businesses located in those areas impacted by the devastating hurricanes last year,” says Jimmy Rester, an investment banker with Morgan Keegan, who represents the firm in Mississippi. 

Damaged businesses in the GO Zone can speed up rebuilding efforts as well through the GO Zone Act as it temporarily reduces demolition and clean-up costs. The act permits businesses to expense 50 percent of demolition and clean-up costs. Brownfield expensing is also extended to include brownfield sites in the GO Zone that are contaminated by petroleum products.

Regions Bank and Morgan Keegan are heavily involved in financing the rebuilding efforts of the Gulf Coast. “We are very excited about this opportunity,” says Hugh White, a Regions Bank representative. “We believe we will be able to be a one-stop shopping experience for our customers as Regions Bank provides the credit enhancement and Morgan Keegan (owned by Regions Bank) underwrites and sells the bonds.” According to Regions Bank’s and Morgan Keegan’s Web site concerning GO Zone bonds, www.gozonebonds.com, interest on GO Zone bonds is exempt from federal and state income taxes. Therefore, the interest rate is lower than through conventional financing, historically saving a borrower 1.5 to 2 percent. The borrower is typically accessing the debt capital markets at the short end of the yield curve in which interest rates are usually their lowest. Even after adding the annual credit enhancement fee to the short-term rates, the borrower’s cost of funds is usually well below those associated with a conventional loan.

The GO Zone Act of 2005 should result in substantial tax savings for many businesses across Louisiana, Mississippi and Alabama. The federal government is estimating a loss of $8 billion in tax revenue from the affected areas. After so much damage was done last August, Gulf Coast businesses still have a long way to go, but the chance to survive and grow in the GO Zone has presented itself.

BILOXI’S GUARANTEED RETURN IS NO GAMBLE Torguson Gaming Group’s 21-story Bacaran Bay Casino Resort, in Biloxi, Mississippi, will include a 75,000-square-foot casino and a 40-lane bowling alley. While many people have seen the horrible images of the Gulf Coast region post-Hurricane Katrina on the nightly news, others experienced it up close and personal. Some areas, mostly the lower lying areas, were hit harder than other areas of the coast. And some areas are recovering more quickly than the rest of the region. Biloxi, Mississippi, and its casinos are a great example of the American spirit preserving through tragedy. As the long road to recovery has begun for Biloxi, it might be surprising as to how far the city has rebounded. Before the casinos were built in 1992, Biloxi might as well have been a ghost town. “You could lay down on Highway 90, which stretches along the beachfront, and take a nap back then,” says Sam Ford, a broker associate and commercial specialist for Coldwell Banker Alfonso Realty. Ford was born and raised in the Gulf Coast region of Mississippi and has worked in the real estate business there since 1976. “The casino industry brought in everything to Biloxi including retail space and restaurants and it just mushroomed into a wonderful area,” Ford says. So, when Hurricane Katrina blasted through the region last August and destroyed the majority of Biloxi’s casino row, the impact was tremendous. Not only had some of Biloxi’s residents lost house and home, the industry that drove the city had taken the kind of punch never seen before. Almost miraculously, today, three casinos are open for business again in Biloxi. They include Imperial Palace, Isle of Capri Casino Resort and Palace Casino Resort. “Those three casinos have recaptured between 60 and 70 percent of their entire business that was pre-Katrina,” Ford says, “Which is amazing.” Imperial Palace is open and includes 1,000 refurbished hotel rooms and new restaurants. Isle of Capri Casino Resort and Palace Casino Resort reopened their casinos inside their hotels. “The majority of casinos are moving their barge operations into their hotels,” Ford says. “They can open very quickly that way and they don’t have a floating tub anymore.” The state of Mississippi changed its gaming laws last year whereas casinos can move 800 feet off the water. According to Ford, it is beginning to assume more of a Las Vegas feel. The flagship casino for Biloxi is the Beau Rivage Resort & Casino. It plans to reopen on the 1-year anniversary of Hurricane Katrina, August 29. It also plans to open a new golf course in the fall as well. As for other casinos, Harrah’s Entertainment has decided to focus on its Biloxi location and sold its Gulfport, Mississippi, location to its next door neighbor, Copa Casino. Harrah’s Biloxi Grand Casino has announced a re-opening date of August 17 in the BayView Hotel, a temporary location. Meanwhile, a smaller version of the Biloxi Grand Casino is being designed. Treasure Bay Casino Resort plans to reopen in September with gaming operations located inside its hotel. Boomtown Casino’s barge is undergoing repairs at a Pascagoula, Mississippi shipyard, and it hopes to open a new facility to adjoin its former casino. Casino Magic plans to open in Bay St. Louis, but its Biloxi plans remain uncertain. Finally, Hard Rock Hotel & Casino’s plans are also on hold. Biloxi and its casino market are doing better than expected. “There is a huge market in the local area and Biloxi is also a drive-in gaming community,” Ford says. “We are only 1 hour from New Orleans, 1 hour from Mobile and 3 hours from Jackson.” The casino hotels, which are at least 300 rooms apiece, made sure to open very quickly, according to Ford. “Biloxi is still a drawing card,” Ford says. “People from all over the country are curious. They are coming down and taking pictures. If someone happens to be on Interstate 10, he might stop by the beachfront to take a look and help out.” According to Ford, most people who visit Biloxi are inspired by the effort they are witnessing from the city’s people.  Not only are Biloxi’s older casinos trying to rebuild, but the Biloxi city council recently approved zoning changes needed for a new casino, Bacaran Bay Casino Resort, which will be located on Caillavet Street and connected to The Villas at Bacaran Bay, an upscale hotel condominium development. Torguson Gaming Group has mapped out a $500 million master plan for the casino and resort, and is moving forward to receive approval to commence construction from the Mississippi Gaming Commission. Located on Back Bay Biloxi, Torguson Gaming Group hopes Bacaran Bay Casino Resort will unite casino row with the back bay. This will be the first project of this magnitude to break ground in Biloxi since Hurricane Katrina. The 21-story project will include 646 hotel suites, 432 one- and two-bedroom condominiums, a 75,000-square-foot casino, a 40-lane bowling alley, movie theaters, buffet and specialty restaurants, shopping esplanade, a spa, salon and fitness center, and an 18-hole Arnold Palmer golf course. If approved, construction would begin this spring with a completion date anticipated in 2008 or 2009. It is anticipated to create more than 2,000 jobs. The Biloxi city council has also passed the $1 billion Broadwater Resort proposal. The plans call for two casinos on the site of the Broadwater Hotel. The resort will include 3,375 condominiums and 1,900 hotel rooms on site as well as an 18-hole golf course. The project has a goal of being completed by December 2008. Most businesses in Biloxi, like the casinos, are going to rebuild and stay in Biloxi because the majority of their business is there. Most of the offices are not located close to the beach, so the majority did not take the brunt of the damage. “Biloxi’s railroad tracks, which sit approximately 1,500 to 2,000 feet north of the beach, act as a natural dike,” Ford says. “I think that helped insulate some of the areas north of the railroad tracks.” However, according to Ford, the service industries in Biloxi, including the casinos, are hurting for employees as most were displaced from their homes. “The city is lacking for restaurants workers, clerks and other service employees,” Ford says. In turn, the modular home business has taken afoot in Biloxi. “There are some companies that can build you a modular home in only 3 days,” Ford says. This allows people to have a place to call home while they rebuild. With some of the populous displaced, Biloxi has witnessed a surge from developers on multifamily-zoned properties or properties in an area in which multifamily is not difficult to re-zone. “That is a huge niche is the market,” Ford says. “There is an influx of developers to the market. I deal with two new developers every week as well as local developers scrambling for acreage sites.:” Biloxi is recovering much quicker than some other Gulf Coast cities. Unfortunately, Bay St. Louis and Waveland, Mississippi, which are lower lying areas, lost approximately 85 to 90 percent of their businesses completely, according to Ford. And, everyone knows the story of low-lying New Orleans. “We seem to have more money around the Biloxi area and we have been able to get up onto our feet,” Ford says. “There is just a lot of business to be had here.”  — Daniel Beaird

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.