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   Tax-Exempt Bond Financing: GO Zone BondsOverview
Gulf Opportunity Zone Bonds present a unique opportunity for private business owners and corporations to borrow capital at very favorable tax-exempt rates to acquire, construct, reconstruct or renovate non-residential real property, qualified residential rental projects, and public utility property in the GO Zone. Since 1986, tax-exempt bond issues have been restricted to governmental agencies, qualified private activity bonds, or not-for-profit organizations. These restrictions on tax-exempt debt have been modified by Congress in the Gulf Opportunity Zone to allow private business owners and corporations this unique advantage for a limited time. Interest on these GO Zone bonds will be exempt from both federal and state income taxes and will be exempt from inclusion in the federal Alternative Minimum Tax; therefore, the interest rates will be significantly lower than rates available through conventional financing. Under the GO Zone Act, a wide range of businesses, including public and private corporations, retailers, commercial developers, utilities and hospitals, have the opportunity to build or rebuild at borrowing costs that can be as much as 1.5% to 2% below conventional financing options. This piece of legislation represents a significant opportunity for Louisiana businesses to get back on track. While the capital still must be raised from private sources, businesses will essentially be able to use the state's tax-exempt borrowing authority to borrow money at a low interest rate, creating an extraordinarily important financial option for rebuilding. The GO Zone Act provides Louisiana authorization to issue approximately $7.9 billion in tax-exempt private activity bonds in the GO Zone to finance the acquisition, construction and renovation or rehabilitation of nonresidential (commercial) property, qualified low-income residential rental housing, and public utility property.
Qualifying projects In order for GO Zone Bonds to be treated as tax-exempt bonds:
"Qualified project costs" include the costs of acquisition, construction, reconstruction and renovation of nonresidential real property (including buildings and their structural components and fixed improvements associated with such property), qualified residential rental projects, and public utility properties. Proceeds of GO Zone Bonds generally may not be used to finance equipment. However, fixtures and integrated equipment assembled in construction of qualified projects, or that become a component part of an immovable property may, in many instances, be financeable. In other words, some equipment may be considered immovable (consult your tax attorney). Examples of projects that would qualify include: retail stores, warehouses, manufacturing facilities, office buildings, hotels, medical facilities and other commercial facilities. This is one of the most significant features of the entire GO Zone Act. In effect, for a limited time and in a limited geographic area, tax-exempt bond financing is available to private businesses and developers for a wide range of development projects, as it was prior to 1986, when Congress acted to limit the use of tax-exempt financing for private business activities. Small businesses in hurricane-impacted areas that were viable before the storms but are now less creditworthy because of the hurricanes will also be able to take advantage of the tax-exempt borrowing provision in the GO Zone Act. Act 41 of the 2006 First Extraordinary Session of the Louisiana Legislature authorizes the state to provide loan guarantees or credit enhancements, in an amount not to exceed $70 million, to qualified small businesses for up to 50 percent of the loan amount made under the Go Zone Act. For small businesses, the costs associated with accessing funds through a bond issue can be expensive. Some financial institutions have put together pooled loan programs that allow borrowers to "share" the costs of issuance with other borrowers. The flexibility of the pooled program makes it attractive to smaller borrowers because it allows them access to the capital markets, yet each loan has its own structure. While proceeds of these bonds must be used for qualified projects in the GO Zone, the private companies receiving the proceeds and pursuing the projects need not have previously done business in the GO Zone or in Louisiana. The legislation thus creates a major incentive for investment in the GO Zone by startups, expanding businesses, and national and international developers as well. When combined with local tax incentives and other state tax incentive programs such as those outlined in Part XIV of this Guide, the business climate will be very friendly in Louisiana for the duration of the GO Zone time frame. In addition, GO Zone Bonds may be used to finance qualified residential rental projects located in the GO Zone. Under the GO Zone Act, a project is a qualified residential rental project if 20% or more of the residential units in the project are occupied by individuals whose income is 60% or less of the area median gross income, or if 40% or more of the residential units are occupied by individuals whose income is 70% or less of the area median gross income. This differs from a project located outside of the GO Zone, which requires that 20% or more of the residential units in such projects must be occupied by individuals whose income is 50% or less of the area median gross income or if 40% or more of the residential units are occupied by individuals whose income is 60% or less of the area median gross income.
Key parameters The window of opportunity for taking advantage of tax-exempt financing in the GO Zone is significant. The GO Zone Act stipulates that GO Zone Bonds must be issued after the date of enactment (Dec. 22, 2005) and before Jan. 1, 2011. GO Zone Bonds may be issued by the State of Louisiana or any of its political subdivisions, including statewide issuers and local public trusts or industrial development boards. The maximum aggregate face amount of GO Zone Bonds that may be issued in the State of Louisiana is limited to $7,839,750,000. All bonds must be recommended by Louisiana Economic Development (LED) and approved by the Governor and the Louisiana State Bond Commission (SBC). GO Zone Bonds are not an obligation of the State of Louisiana or any political subdivision that issues them. The proceeds do not constitute a grant of funds, but are instead a loan of the proceeds of such tax-exempt bonds to a "borrower." Accordingly, the creditworthiness of the borrower is an essential factor in the issuance and marketability of a GO Zone Bond.
Application/allocation process The State of Louisiana will authorize the issuance of the bonds, and a state conduit issuer will issue the bonds on behalf of a qualified borrower. The borrower receiving the bond proceeds will be responsible for making principal and interest payments with no liability to the State. As noted above, LED, the Governor of the State of Louisiana, and the SBC are responsible for allocating the $7,839,750,000 ceiling (the "GO Zone Ceiling") to qualified borrowers. Pursuant to Executive Order KBB 06-09, dated Feb. 16, 2006, the issuer of the GO Zone Bonds must submit an application to LED, with a copy of the application also submitted to the Governor and to the SBC staff, requesting an allocation from the GO Zone Ceiling and further requesting designation of such bonds as Gulf Opportunity Zone Bonds. It is up to the borrower to select this bond issuer and to assemble the appropriate credit enhancement and financing team. The first steps should be to contact your bond attorney and financial partner to assist you through the process. Once the application is received, LED provides a report (within two weeks and not longer than four weeks) to the Governor and the SBC supporting or opposing the allocation. Allocations approved by the Governor are then referred to the SBC for approval. The evaluation of applications by LED will be based on criteria including location, jobs (new and retained), wages, industry, proficiency of job qualifications, and other factors. The support of commercial banks, investment bankers, tax advisers, and bond counsel will be critical to the steps many companies take in the GO Zone bond process. Professional advisers are available to help investors navigate through the complex process of debt offerings, as well as assist with the required state application and approval process.
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An integral part of the federal assistance made available in the GO Zone to support the rebuilding and revitalization of the local and regional economies impacted by hurricanes Katrina and Rita is a new category of tax-exempt private activity bonds referred to in the GO Zone Act as "Gulf Opportunity Zone Bonds."