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Gulf Opportunity Zone Act of 2005 - P.L. 109-135

Gulf Opportunity Zone Bonds-IRC Section 1400N(a)

Section 101(a) of the Act amends the Internal Revenue Code by adding Section 1400N(a) which authorizes the issuance of qualified private activity bonds to finance the construction and rehabilitation of residential and nonresidential property located in the Gulf Opportunity Zone. Gulf Opportunity Zone Bonds must be issued after the date of enactment and before January 2, 2011.

Gulf Opportunity Zone Bonds may be issued by the State of Alabama, Louisiana, or Mississippi or any political subdivision thereof. Issuance of bonds authorized under the provision is limited to projects approved by the Governor of the State (or the State bond commission in the case of a bond which is required under State law to be approved by such commission) in which the financed project shall be located. The maximum aggregate face amount of Gulf Opportunity Zone Bonds that may be issued in any State is limited to $2,500 multiplied by the population of the respective State within the Gulf Opportunity Zone. Current refundings of outstanding bonds issued under the provision do not count against the aggregate volume limit to the extent that the principal amount of the refunding bonds does not exceed the outstanding principal amount of the bonds being refunded.  Gulf Opportunity Zone Bonds may not be advance refunded.

Depending on the purpose for which such bonds are issued, Gulf Opportunity Zone Bonds are treated as either exempt facility bonds or qualified mortgage bonds.  Gulf Opportunity Zone Bonds are treated as exempt facility bonds if 95% or more of the net proceeds of such bonds are to be used for qualified project costs located in the Gulf Opportunity Zone.  Qualified project costs include the cost 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 (as defined in section 142(d) with certain modifications) and public utility property.  For purposes of the provision, costs associated with improving a facility may be permitted project costs if such costs are chargeable to the capital account of the facility or would be so chargeable either with a proper election by a taxpayer or but for a proper election by a taxpayer to deduct the costs.

Bond proceeds may not be used to finance movable fixtures and equipment.  The purpose of this limitation is to ensure that property financed with the bonds will remain the Gulf Opportunity Zone.  “Movable fixtures and equipment” does not include components that are assembled to construct an industrial plant.  Such term also does not include consumer appliances installed in owner-occupied residences and rental property financed with the proceeds of Gulf Opportunity Zone Bonds.

Rather than applying the “20-50” and “40-60” test under present law, a project is a qualified residential rental project under the provision if 20% or more of the residential units in such projects are occupied by individuals whose income is 60% or less of area median gross income or if 40% or more of the residential units in such project are occupied by individuals whose income is 70% or less of area median gross income.

Gulf Opportunity Zone Bonds are treated as mortgage bonds if the bonds of such issue meet the requirements of a qualified mortgage issue (as defined in section 143 and modified by this provision) and the residences financed with such bonds are located in the Gulf Opportunity Zone.  For these purposes, residences located in the Gulf Opportunity Zone are treated as targeted area residences.  Thus, the first-time homebuyer rule is waived and purchase and income rules for targeted area residences apply to residences financed with bonds issued under the provision.  Under the provision, 100% of the mortgages must be made to mortgagors whose family income is 140% or less of the applicable median family income.  Thus, the general rule allowing one-third of the mortgages to be made without regard to any income limits does not apply.  In addition, the provision increases from $15,000 to $150,000 the amount of a qualified home-improvement loan that may be financed with bond proceeds.

Subject to the following exceptions and modifications, issuance of Gulf Opportunity Zone Bonds is subject to the general rules applicable to issuance of qualified private activity bonds:

  1. Except as otherwise permitted for a qualified mortgage issue, repayments
    of bond-financed loans may not be used to make additional loans;
  2. Issuance of the bonds is not subject to the aggregate annual State private
    Activity bond volume limits;
  3. The restriction on acquisition of existing property is applied using a minimum of 50 percent of the cost of acquiring the building being devoted to rehabilitation (section 147(d));
  4. The special arbitrage expenditure rules for certain construction bond proceeds apply to available construction proceeds of Gulf Opportunity Zone Bonds issued to finance qualified project costs, treating such bonds as a construction issue (section 148(f)(4)(C);
  5. Interest on the bonds is not a preference item for purposes of the alternative minimum tax preference for private activity bond interst (section 57(a)(5)); and
  6. No portion of the proceeds of the bonds may be used to provide any property described in section 144(c)(6)(B) (i.e. any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, or other facility used for gambling, or any store the principal purpose of which is the sale of alcoholic beverages for consumption off premises).

The provision is effective for bonds issued after the date of enactment and before January 2, 2011.

Gulf Opportunity Zone Advance Refunding Bonds – IRC Section 1400(N)(b)

New Code Section 1400(N)(b), established under section 101(a) of the Gulf Opportunity Zone Act of 2005 provides an additional advance refunding of certain governmental and 501(c)(3) bonds issued by the State of Alabama, Louisiana, or Mississippi, or any political subdivision thereof under new section 1400(N)(b) of the Code.  The provision also permits one advance refunding of certain exempt facility bonds for airports, docks, or wharves issued by the State of Alabama, Louisiana, or Mississippi, or any political subdivision thereof, notwithstanding the general prohibition on the advance refunding of such bonds.

The advance refunding authority under this provision only applies to bonds issued by the State of Alabama, Louisiana, or Mississippi, or any political subdivision thereof which were outstanding on August 28, 2005, and could not be advance refunded under Code restrictions in effect on that date.  Further, to be eligible for the additional advance refunding, the advance refunding bond must be the only other outstanding bond with respect to the  refunded bond.  Thus, at no time after the advance refunding authorized under the provision occurs, may there be more than two sets of bonds outstanding. 

The maximum amount of advance refunding bonds that may be issued pursuant to this provision is $4.5 billion in the case of Louisiana, $2.250 billion in the case of Mississippi, and $1.125 billion in the case of Alabama.  Eligible advance refunding bonds must be designated as such by the governor of the respective State.  Advance refunding bonds issued under the provision must satisfy present-law arbitrage restrictions and all requirements otherwise applicable to advance refunding issues (e.g.  redemption requirements and prohibition on abusive transactions).  Moreover, bonds may not be advance refunded under this provision if any portion of the proceeds.  Moreover, bonds may not be advance refunded under this provision if any portion of the proceeds of such bonds was used to provide any property described in section 144(c)(6)(B),   

The provision is effective for advance refunding bonds issued after the date of enactment and before January 1, 2011.

Modification of Qualified Residential Rental Project Requirements - IRC Section 1400N(n)

Subject to certain requirements, qualified private activity bonds may be issued to finance residential rental property or owner-occupied housing.  Residential rental property may be financed with exempt facility bonds if the financed project is a “qualified residential rental project.”  A project is a qualified residential rental project if 20% or more of the residential units in such project are occupied by individuals is 50% or less of area median gross income.  Alternatively, a project is a qualified residential rental project if 40% or more of the residential units in the project are occupied by individuals whose income is 60% or less of area median gross income

Under the new Code Section 1400N(n), the operator of a qualified residential rental project may rely on the representations of prospective tenants displaced by reason of Hurricane Katrina for purposes of determining whether such individual satisfies the income limitations for qualified residential rental projects and therefore, the project is in compliance with the 20-50 test or the 40-60 test.

This rule only applies if the individual’s tenancy begins during the six-month period beginning on the date when such individual was displaced by Hurricane Katrina.

Extension of Special rules for Mortgage Revenue Bonds under section 404 of the Katrina Emergency Tax Relief Act of 2005

Generally, the Internal Revenue Code imposes several limitations on qualified mortgage bonds, including income limitations for eligible mortgagors, purchase price limitations on the home financed with bond proceeds, and a “first time homebuyer” requirement.   The first-time homebuyer requirement provides that qualified mortgage bonds generally cannot be used to finance a mortgage for a homebuyer who has had an ownership interest in a principal residence in the three years preceding the execution of the mortgage.

The Katrina Emergency Tax Relief Act (“KETRA”), P.L. 109-73 waives the first-time homebuyer requirement with respect to certain residences located in an area with respect to which a major disaster has been declared by the President before September 14, 2005, under section 401 of the Robert  T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina. 

The Gulf Opportunity Zone Act of 2005 extends the waiver of the “first-time homebuyer” requirement provided by KETRA to financing provided through December 31, 2010.

Special Rules for Mortgage Revenue Bonds under Section 1400T of the Code

Section 201 of the Gulf Opportunity Zone Act of 2005 added section 1400T to the Internal Revenue Code.  Generally, special income and purchase price limitations apply to targeted area residences financed with qualified mortgage bonds.  A targeted area residence is one located in either (1) a census tract in which at least 70% of the families have an income which is 80% or less of the state-wide median income or (2) an area of chronic economic distress.  Generally, for targeted area residences, the income limitation is satisfied when no more than one-third of the of the mortgages are made without regard to any income limits and the remainder of the mortgages are made to mortgagors whose family income is 140% or less of the applicable median family income.  The purchase price limitation is raised from 90% to 110% of the average area purchase price for targeted area residences.  The first-time homebuyer requirement does not apply to targeted area residences.

Under new Section 1400T of the Code, residences located in the Gulf
Opportunity Zone (GO Zone), the Rita GO Zone, or the Wilma GO Zone are
treated as targeted area residences for purposes of section 143, with certain
modifications.  Therefore, the first-time homebuyer rule is waived and
purchase and income rules for targeted area residences apply to residences
located in the specified areas that are financed with qualified mortgage
bonds. For these purposes 100% of the mortgages must be made to
mortgagors whose family income is 140% or less of the applicable median
family income.  (Accordingly, the rule allowing one-third of the mortgages to
be made without regard to any income limits does not apply.)  In addition, the provision increases from $15,000 to $150,000 the amount of a qualified home-improvement loan with respect to residences located in the specified disaster area.

The provision is effective on the date of enactment, and applies to residences financed before January 1, 2011. 

Gulf Tax Credit Bonds – IRC Section 1400N(I)

Section 101(a)  of the Gulf Opportunity Zone Act of 2005 adds section 1400N(I) to the Internal Revenue Code and creates a new category of tax-credit bonds that may be issued in calendar year 2006 by the States of Louisiana, Mississippi,  and Alabama (“Gulf Tax Credit Bonds”).  As with previously existing tax-credit bonds (including Qualified Zone Academy Bonds and Clean Renewable Energy Bonds), the taxpayer holding Gulf Tax Credit Bonds on the allowance date would be entitled to a tax credit.  The amount of the credit would be determined by multiplying the bond’s credit rate by the face amount on the holder’s bond.  The credit would be includible in gross income (as if it were an interest payment on the bond) and could be claimed against regular income tax liability and alternative minimum tax liability.

Under the provision, 95% or more of the proceeds of Gulf Tax Credit Bonds must be used to (i) pay principal, interest, or premium on a bond (other than a private activity bond) that was outstanding on August 28, 2005, and was issued by the State issuing the Gulf Tax Credit Bonds, or any political subdivision thereof, or (ii) make a loan to any political subdivision of such State to pay principal, interest, or premium on a bond (other than a private activity bond)  issued by such political subdivision.  In addition, the issuer of Gulf Tax Credit Bonds must provide additional funds to pay principal, interest or premium on outstanding bonds equal to the amount of Gulf Tax Credit Bonds issued to repay such outstanding bonds.  Gulf Tax Credit Bonds must be a general obligation of the issuing State and must be desgnated by the Governor of such issuing State.  The maximum maturity on Gulf Tax Credit Bonds is two years.  In addition, arbitrage rules apply to Gulf Tax Credit  Bonds.

The maximum amount of Gulf Tax Credit Bonds that may be issued is $200 million in the case of Louisiana, $100 million in the case of Mississippi, and $50 million in the case of Alabama.  Gulf Tax Credit Bonds may not be used to pay principal interest, or premium on any bond with respect to which there is any outstanding refunded or refunding bond.  Gulf Tax Credit Bonds may not be used to pay principal, interest, or premium on any prior bind if the proceeds of such prior bond were used to provide any property described in section 144(c)(6)(b) (i.e. any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal purpose of which is the sale of alcoholic beverages for consumption off premises).  This provision is effective for bonds issued after December 31, 2005 and before January 1, 2007.


Further Information about the Gulf Opportunity Zone Act: 

Full text of P.L. 109-135

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, December 16, 2005.

Chief Counsel Implementing Guidance:

Notice 2006-41 (Gulf Opportunity Zone Bonds, Gulf Opportunity Zone Advance Refunding Bonds and Gulf Tax Credit Bonds)
This notice provides guidance with respect to the information reporting requirements applicable to Gulf Opportunity Zone Bonds, Gulf Opportunity Zone Advance Refunding Bonds, & Gulf Tax Credit Bonds issued pursuant to section 1400N of the Internal Revenue Code. The notice also provides additional guidance with respect to the credit rate and arbitrage requirements applicable to the Gulf Tax Credit Bonds.

Notice 2006-21, 2006-12 IRB 643 (GO Zone Resident Population Estimates)
This notice informs the states of Alabama, Louisiana and Missisippi of their state population portion in the GO Zone to determine the Gulf Opportunity housing amount (under 1400N(c)(1)(B) and maximimum aggregate face amount of qualified Gulf Opportunity Zone Bonds (under sec. 1400N(a)(3) of the Code.
Chief Counsel is expected to issue guidance with respect to the information reporting requirements applicable to Gulf Opportunity Zone Bonds, Gulf Opportunity Zone Advance Refunding Bonds, and Gulf Tax Credit Bonds issued pursuant to section 1400N of the Internal Revenue Code.  Guidance with respect to the credit rate and arbitrage requirements applicable to Gulf Tax Credit Bonds and the treatment of the credit by holders of Gulf Tax Credit Bonds is also anticipated.

Page Last Reviewed or Updated: 18-Apr-2014