WASHINGTON – The Internal Revenue Service has initiated an audit of $26.5 million of zero coupon bonds issued by an authority in Wisconsin last August to monetize a grant Dallas gave to a company redeveloping buildings that housed the old Statler Hotel and Dallas Public Library.
The audit was disclosed in an event notice posted on the Municipal Securities Rulemaking Board's EMMA website by Orrick, Herrington & Sutcliffe, the bond counsel and issuer's counsel in the transaction.
The notice said that the IRS notified the issuer, the Wisconsin-based Public Finance Authority, of the audit in a Jan. 12 letter that said the bonds were "selected for examination because of information [the IRS] received from external sources or developed internally that causes a concern that the debt issuance may fail one or more provisions of section 103, 141-150 of the Internal Revenue Code."
"The issuer believes that the bonds complied with all applicable provisions of the Internal Revenue Code, and … will cooperate with the IRS in its examination of the bonds," the notice said. It added, however, "No assurance can be given with regard to the outcome of such examination and its effect on the tax exemption of the bonds or the marketability of the bonds."
The notice points out that, in the official statement for the bonds, the issuer disclaims any contractual or tort liability for damages resulting from any breach of the disclosure agreement. The OS said bondholders "may seek a writ of mandamus to compel the issuer to comply with its agreement." According to the OS, the developer of the project, Commerce Statler Development LLC, has undertaken all responsibility for continuing financial and operating disclosure with regard to the project.
The development company was created by Mehrdad Moayedi, who is also president and chief executive officer of Centurion American Development Group. He, through CADG and some subsidiaries, has been involved in the development of $2 billion of 70 master planned residential community projects in North Texas. Some of those projects have been funded with help from United Development Funding, located in Grapeville, Texas, the offering document said. The UDF projects are under federal investigation because J. Kyle Bass, the founder of the asset management firm Hayman Capital Management L.P., alleged they were part of a Ponzi scheme, according to the OS for the Statler Hotel/Dallas Central Library project.
The OS said the UDF projects are not associated with the funding for the development of the project in Dallas.
According to the OS, the $221.6 million two-building project is within a tax increment reinvestment zone created by the Dallas City Council. The city made a grant to the developer of up to $46.5 million from the TIF district, which the OS refers to as a TIF subsidy. The TIF money can be used to finance certain costs, mostly expenditures made for public infrastructure improvements. The developer can receive the TIF subsidy upon completion of the project, the OS states.
The bonds are to be used to finance the cost of the acquisition of a portion of the grant made by the city, so the developer can obtain the money upfront for the project.
The bonds are to be repaid with the grant money and income from any other investments made under a trust agreement between the bond issuing authority and trustee Wilmington Trust, NA.
It is unclear why the bonds were issued by the Wisconsin-based authority. One source said Dallas does not issue TIF bonds. However, the city approved the bond sale based on the estimated money from the TIF district, a city official told a local paper.
About $11.1 million of the bonds are due in 2027, $7.5 million in 2028 and $7.9 million in 2029. They are all subject to optional redemption at the direction of the city of Dallas on or after Sept. 1, 2026.
The lawyer at Orrick involved in the transaction could not be reached for comment.
The Dallas Morning News has signed a 16-year lease to move into the old Dallas Central Library.
The bonds were underwritten by Jefferies. Winstead PC was underwriter's counsel.
