WASHINGTON — The Internal Revenue Service is auditing $228.1 million of “green” bonds issued in February 2007 by the Syracuse, N.Y., Industrial Development Agency to determine if they violated tax laws.
The IRS informed SIDA of the audit in a March 17 letter, less than a month after the issuer and the developer, Destiny USA Holdings LLC, sent a 13-page letter to the IRS warning that a legal dispute and the economy had caused it to fail to meet the requirements needed for the debt to be “qualified green building and sustainable design project” bonds.
In the letter, Destiny asked the IRS to issue a ruling concluding that its inability to achieve the conservation and technology goals required by the tax law would not cause the bonds to lose their tax-exempt status. The developer also wanted assurance that the money in the reserve account for the bonds would not have to be paid to the Treasury Department.
Instead, the IRS began an audit of the bonds and told SIDA in its letter that the bonds were “selected for examination because of information we received from external sources or developed internally that causes a concern that the debt issuance may fail one or more provisions of section 103 [and] 141-150 of the Internal Revenue Code.”
SIDA disclosed the IRS audit letter in an event notice posted on the Municipal Securities Rulemaking Board’s EMMA system Thursday.
In the notice, Destiny, a conduit borrower that is part of an affiliated group of partnerships referred to as the Pyramid Cos., said it “believes that all requirements of the Internal Revenue Code relating the bonds have been fulfilled” and that it “will continue to cooperate with the IRS in its examination to protect the exclusion from gross income of interest on the bonds.”
The project was to be financed with the green bonds, payments in lieu of taxes or PILOTs, a $155 million construction loan from Citi, $40 million of equity from Pyramid entities and almost $10 million of other available funds.
Congress allocated $2 billion of green tax-exempt private activity bonds in 2004 to be used for qualified green buildings or sustainable design projects.
In 2006, the IRS allocated private-activity bond volume cap for the project after Destiny described the national conservation and technology innovation objectives and goals that would be met by the project.
Each application had to describe how the project would reduce electric consumption; provide conservation and energy efficiency in building designs; provide non-conventional generation capacity such as solar photovoltaic, wind, or biomass, or fuel cell generation; and reduce daily sulfur dioxide emissions.
SIDA issued the bonds in 2007 and loaned the green bond proceeds to Destiny to finance an expansion of the Carousel Center shopping complex in Syracuse, which had begun operation in 1990.
Construction started on the project in 2007, but halted in May 2009 after Citi stopped advancing money from a $155 million construction loan because of concerns about cost overruns and that there were no leases for the new space. Destiny then sued Citi, accusing it of breaching the loan agreement.
Last December, Destiny and Citi announced that they had resolved their legal dispute and indicated that the project would once again be able to move forward.
The parties refused to release details of the settlement.
In its letter to the IRS, Destiny said that “significant changes in the economy” had caused it to modify its projections.
The IRS required each issuer of green bonds to put up to 1% of net bond proceeds in an interest-bearing reserve account that would only be released later if the IRS, in consultation with the Environmental Protection Agency, determined the project had met its goals.
