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Paul Varner, Butler Snow O'Mara Stevens & Cannada, PLLC

Mississippi healthcare providers are capitalizing on benefits provided by the Gulf Opportunity Zone Act (GOZA) of 2005, passed by Congress eight months ago to supply significant economic incentives to rebuild the Gulf Coast and to attract new investments to the affected areas.

"In general, incentives that can best be utilized by the medical community include the fact that GO Zone bonus depreciation will make it less costly for a medical group to expand or build a new clinic building or to purchase expensive diagnostic equipment," said Paul Varner, leader of the tax group at Butler Snow O'Mara Stevens & Cannada, PLLC.

The Jackson-based law firm has already closed one GO Zone bond issue — a $40 million mortgage revenue bond — and is scheduled to soon close two more.

"We've induced in a project through the Mississippi Business Finance Corporation for a medical facility in Picayune," said Butler Snow attorney Lucien Bourgeois, a member of the firm's public law and finance group who concentrates on municipal bonds and public finance. "The GO Zone bonds can be utilized to finance private profit organizations for any type of medical facility such as hospitals, medical offices, clinics, et cetera. The interest earned by the bond holders is exempt from federal and state income taxes, thus resulting in a lower cost of borrowing for the private profit organization."

Jackson attorney Robert Lazarus, a partner with Watkins Ludlam Winter & Stennis, PA, who has handled hundreds of municipal and corporate finance projects, including the bond issue for Nissan-Canton, said prior to the adoption of GOZA, except in certain specific instances such as solid waste disposal bonds, the proceeds of tax-exempt revenue bonds could not be used for projects that were determined to have more than an insignificant amount of "private use."

"In connection with healthcare facilities, private use results when physicians or other professionals utilize the financed assets in their trade or business," Lazarus explained. "Under prior law, facilities that were to be used by one or more physician practice groups could only be financed with tax-exempt bond proceeds if the terms of the contract between the hospital and such groups conformed to certain provisions that the IRS deemed not to be private use. Among other things, the restrictions pertained to the duration of the contracts and the compensation to be paid to the physicians group. Facilities such as medical office buildings, clinics and outpatient service facilities, even if owned by nonprofit or community hospitals and leased to physicians, were deemed to be used in the physicians' trade or business, and therefore could not be financed with the proceeds of tax-exempt bonds.

To encourage redevelopment of business in the GO Zone, GOZA provides for the issuance of tax-exempt bonds for projects that previously could only be financed on a taxable basis. (Tax-exempt bonds generally bear interest at a lower rate than taxable debt and result in cost savings to the landlord and/or the tenants of the project.)

"In addition, interest on bonds issued for qualified projects in the GO Zone is not subject to the alternative minimum tax," said Lazarus. "GOZA provides for the issuance of approximately $4.8 billion of tax-exempt bonds for qualified projects in Mississippi, which are subject to standards that are much less restrictive than in previous years."

A qualified GOZA bond must devote at least 95 percent of the proceeds of the bond used for "qualified project costs," which include the cost of acquisition, construction, reconstruction, and renovation of nonresidential real property, including fixed improvements associated with such property, located in the GO Zone.

"Proceeds of GOZA bonds may not be used to finance movable fixtures and equipment," added Lazarus. "This restriction was inserted because the bonds are intended to finance the acquisition or construction of buildings and their structural components and fixed improvements associated with the property, and not to acquire movable property that could be removed from the targeted area."

GOZA provides a bonus first-year depreciation provision that could allow substantial tax benefits for privately owned related healthcare facilities.

"The bonus depreciation deduction for qualified GO Zone property — equal to 50 percent of the basis — is provided in addition to the ordinary first-year depreciation, which is calculated on the remaining basis in that newly acquired property," said Lazarus. "Qualified GO Zone property includes purchased software, leasehold improvements, most property having a recovery period of 20 years or less, and certain equipment. It also encompasses nonresidential real property and residential real property. It's limited to property which is originally used by the taxpayer on or after Aug. 28, 2005 and placed in service before either Dec. 31, 2008 — residential rental property and non-residential real property — or on Dec. 31, 2007 (for) all other property."

The additional allowance for this depreciation may not apply to any property, any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under Section 103 of the IRS Code, explained Lazarus.

"Thus, developers of related healthcare facilities may have to decide if tax-exempt financing provides more or less benefits than those resulting from the bonus depreciation," he said. "In the case of privately-owned related healthcare facilities, it may be advisable to finance such projects on a conventional (taxable) basis. If the project is large enough, it may make sense to have taxable bonds issued by the Mississippi Business Finance Corporation, the proceeds of which can be used for construction costs and equipment purchases – which may result in savings pertaining to sales taxes applicable to component materials used in the construction and with respect to the equipment — and to take advantage of the bonus depreciation.

"Companies in the healthcare industry, including physician groups, should seek counsel to determine how they might benefit from these provisions."

John Scott, CPA, a partner with Horne LLP in Jackson, cautioned that the GO Zone legislation was put together and passed rapidly, and many questions remain unresolved about the application of particular provisions.

"The IRS has promised guidance," he explained. "They realize they need to issue some more pronouncements on how the rules will be applied. They say it's imminent, anytime over the summer. The point is, people are going to have to be continually monitoring the legislation and the IRS pronouncements because some of the provisions will be sharpened more."

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