BRADENTON, Fla. — The Florida Municipal Loan Council and the city of South Miami have notified investors in the Series 2002A and 2006 pool bonds that they have voluntarily entered the Internal Revenue Service’s compliance program.
FMLC and South Miami hope to resolve issues that could affect the tax-exempt status of the bonds. They entered the IRS’s Voluntary Compliance Agreement Program last week after
The SEC is “alleging that in the underwriting, offering, sale, and purchase of the bonds that there may have been made false statements of a material fact or a failure to disclose material facts concerning, among other things, the tax-exempt status of the bonds,” the notice posted on EMMA said.
The SEC demanded all documents, agreements, financial statements, communications, legal and tax opinions relating to the city’s downtown garage project as well as information exchanged between the FMLC and the city in connection with the bond sale.
Last week, the SEC ordered testimony to be taken with regard to whether any false statements were made or whether there was a failure to disclose material facts concerning the tax-exempt status of the bonds, among other things.
“We are complying voluntarily with all the information requested by the Securities and Exchange Commission,” said Kraig Conn, attorney for the league and the FMLC. “The Loan Council, working with the city of South Miami, will do everything in our power to make sure the interest on those bonds remains exempt from taxation as we covenanted to do.”
Conn said the FMLC has issued at least 17 pool bond issues since 1998-99 and this is the first time any pool bond proceeds have been called into question.
South Miami’s attorney, Laurence Feingold, refused to comment. He also refused a public records request for copies of the SEC letters that the city received.
Feingold told city commissioners in a public meeting last week that the controversy surrounds a 50-year lease the city entered with a private developer to build and operate the municipal parking garage, according to a report in the Miami Herald.
Several tax experts said the problems could surround the length of the lease and violations of the tax code regarding private uses of facilities financed with tax-exempt debt.
The city hired Squire, Sanders & Dempsey LLP to represent it in this matter. The firm did not return a call seeking comment.
The city reportedly hired another attorney to investigate legal opinions issued by Bryant, Miller and Olive LLP, which was bond counsel on the 2002A and 2006 transactions. That firm also could not be reached for comment.
In addition to South Miami’s problem, other borrowers in the two conduit issuances may have tax liabilities, said Tom Vander Molen, a partner in Dorsey & Whitney LLP’s tax and public finance groups. They should not have securities law problems with the SEC if they were unaware of the problems involving South Miami, he said.
“On the other hand, from a tax standpoint, theoretically at least, if there’s a problem with even one issue in the pool, that could negatively impact the tax exemption on all of the bonds,” Vander Molen said.
It’s likely that the FMLC and South Miami are working with the IRS’ voluntary compliance program because of that concern, he said, adding that a problem with part of the pool could affect all of the bonds, even though other borrowers may have done nothing wrong.
“I’d be more concerned if I was one of the other issuers about the potential tax consequences if the [voluntary compliance program] doesn’t fix the problem than I would about securities liability,” Vander Molen said.
In the 2002A deal, $49.7 million of pool bonds were sold. In addition to South Miami, the other borrowers and the amounts they borrowed were Cape Coral, $4.58 million, DeFuniak Springs, $1.24 million, Golf, $2.24 million, North Miami, $3.33 million, North Miami Beach, $11.5 million, Oakland, $2.54 million, Palm Springs, $7.9 million, Pinecrest, $7.74 million, and Stuart, $2.19 million.
In the 2006 deal, other borrowers and amounts were Belle Isle, $1.48 million, Deerfield Beach, $5.96 million, Gadsden County, $2.4 million, St. Pete Beach, $3.9 million, and Valparaiso, $2.96 million.
Both offerings were underwritten by Banc of America LLC and insured by MBIA Insurance Corp.
