WASHINGTON — The Internal Revenue Service is auditing two special assessment bond issues totaling $64.46 million that were sold in May 2006 by the Wentworth Estates Community Development District in Florida and went into default.
The audit, which appears to be part of an IRS inititative to gauge the tax law compliance of developer-driven deals, was disclosed in an event notice the district filed with the Municipal Securities Rulemaking Board’s online EMMA system.
The 2006 bonds were issued to finance a stormwater management system, roadway improvements, landscaping and other infrastructure associated with a 1,044-acre master luxury residential golf course community located near Naples.
The Wentworth District had planned to include 1,200 single-family housing units, but as of 2011 only 44 units had been built with 24 of them occupied, according to a quarterly disclosure report the district posted on the EMMA website.
“This place is effectively dead in the water,” said Richard Lehmann, publisher of Distressed Debt Securities Newsletter and the Florida Community Development District Report website. “There is a question if they are actively marketing the district.”
Wentworth’s situation is not unique. It is one of 600 such districts in Florida. More than 160 of them have defaulted on about $5 billion, according to Lehmann, who uses a broad definition of default that includes withdrawals from reserve funds.
Community development districts are special-purpose local governments and political subdivisions under Florida law. Typically a developer creates a district, which then issues bonds for infrastructure for a community. The developer sells lots and assesses the homeowners fees that are used to pay off the bonds.
The Wentworth district defaulted on its bonds, but then entered into a settlement and forbearance agreement late last year, according to a March 7 disclosure document on EMMA.
The forbearance agreement is with developer Lennar Homes LLC and says the district’s Series B bonds “would be cancelled through a prepayment of assessments by Lennar and the developers would purchase the district’s A bonds from the bondholder.” Lennar was to purchase the bonds at a discount, according to a person familiar with the project.
The IRS notified the district in a March 19 letter that it “selected the debt issuance for examination” and said it routinely examines municipal debt issuances to determine compliance with federal tax requirements. The IRS asked the district to mail 19 bond-related documents back to it within four weeks.
The documents include: all of the district’s meeting minutes related to the approval of the bonds under audit; schedules or reports showing how the bond proceeds, including investment earnings, were allocated to the components of the project facilities; and evidence to establish that interest paid on the bonds during 2006 was reported to the beneficial bondholders.
The IRS field office, headed by Bob Henn, acting director of the IRS tax-exempt bond office, is auditing multi-functional district financings, or developer-driven deals, and is looking at where the issuers are legally qualified under the tax laws to issue bonds as well as how the developer turned over its assets to the district that issued the bonds.
Prager, Sealy & Co., LLC was underwriter for the 2006 bonds and Greenberg Traurig PA was bond counsel, according to the official statement.
Meanwhile, the IRS closed an audit of $600 million of Build America Bonds issued by the Metropolitan Water Reclamation District of Greater Chicago in August 2009 without altering the federal subsidy payments received by the issuer.
The IRS had been examining the issue price of the BABs, which is key to determining the amount of subsidy payments the Treasury makes to the issuer. The IRS also closed an audit of $21 million of general obligation bonds issued by the Spring Grove, Pa., Area School District in 2005 with no change to the tax-exempt status of the bonds.
