WASHINGTON - The Village Center Community Development District's issuance of $64.3 million of recreational revenue bonds "effectively perverts" Florida law by allowing the private developer of the Villages retirement community to "engage unchecked in self-dealing," an Internal Revenue Service agent warned in three notices he sent the district last month.
In the notices, IRS agent Dominick Servadio Jr. said that the board of supervisors for the CDD - which issued the bonds to finance the purchase of two golf courses, several parks, and other facilities from the developer, the Villages of Lake Sumter Inc. - is made up entirely of high-ranking employees or people affiliated with the developer. As a result, the agent said, the board could not have exercised independent oversight of the bond transaction.
Furthermore, the district was established so that the developer always will control it rather than area residents, he said. Under Florida law, district boards should no longer be controlled by the developer after at least 250 residents of voting age live in the district.
The agent also claimed that the CDD overpaid by about $52.5 million for the 19 facilities it bought from the developer.
Servadio detailed his concerns about the bonds, which were issued in 2003, in three separate notices that identify problems that could make the bonds taxable. He said that the Village Center CDD does not qualify as a political subdivision or as an "on behalf of" issuer of tax-exempt bonds.
Under a Florida law enacted in 1980, a private developer can create community development districts in order to finance public infrastructure projects with tax-exempt debt, either by directly financing the projects or purchasing them from the developer. The districts must consist of a five-member board of supervisors that is elected every two years.
Although initially the landowners in the district can serve on the board, the law states that the developers should turn over control of the CDDs to residents of the community once it has been established. Servadio said the CDD has had no residents during its 16-year existence, largely due to the fact that it is a non-residential commercial district, and that it is structured "apparently to ensure the developer's control over the board of supervisors."
When the bonds were issued, the board consisted exclusively of individuals either employed by or affiliated with the developer. Although there are several new members of the board, it still is exclusively made up of individuals tied to the developer, he said.
In addition, Servadio believes the bonds were overissued and as a result, may be taxable arbitrage bonds because the 19 facilities acquired with the bond proceeds were overvalued.
In preparation for the deal, the district received two appraisals of the facilities from Fishkind & Associates Inc. and Public Resources Management Group Inc., which each established a purchase price of $60 million.
But Servadio said that he was able to determine through a third-party contact that the facilities were worth only between $6.8 million and $7.5 million, and that there is an apparent lack of independence in the two appraisals.
He noted that Fishkind, which also provided appraisals for four earlier CDD bond issues, not only appraised the facilities in 2003, but also served as the district's financial adviser for the deal. As a result, Fishkind was "working both sides of the fence," Servadio said. "There is no 'independence' at all in this situation."
The IRS agent also found PRMG's appraisal lacking in independence, even though the firm had no official role in the transaction. The firm cannot be viewed as independent since they acted at the direction of the district and the developer, Servadio said.
"They did what they were told, or by inference, paid to do by the district," he told the CDD in one of the notices.
Servadio claimed the bonds also may be taxable because they meet they meet the private payment and private use tests for private-activity bonds, but do not fall within one of the PAB categories for tax exemption. Under the tax law, bonds are private-activity bonds if more than 10% of the proceeds are for private use and more than 10% of the proceeds are from private payments. However, only certain categories of projects financed by PABs qualify for tax-exemption.
Servadio told the CDD that using the bond proceeds to acquire a golf course that is only available to community residents, not the general public, is not an essential government function but rather private use. Because the so-called amenity fees that residents of other districts in the retirement community pay in exchange for the right to use the private facilities go towards debt service on the bonds, they constitute private payments, he said.
The Village Center CDD, and the related Sumter Landing Community Development District, have disclosed the IRS' concerns, not only to holders of the 2003 bonds, but also to holders of other bonds issued by the CDDs. The notifications were made to holders of six other bond deals because they share "certain similarities" with the 2003 bonds that may be declared taxable, the CDDs said.
The IRS notices come after the agency in 2003 audited similar bonds issued by the Village Center CDD in 1998, but closed that audit without taking any action. The IRS reserved the right to reopen the audit if new information arose.
The bonds were underwritten by Prager, Sealy & Co., with Akerman Senterfitt serving as bond counsel. District officials provided The Bond Buyer with the IRS notices, but they referred calls to their bond attorney, who could not be reached for comment.
