WASHINGTON - The Internal Revenue Service is expected to challenge the Scottsdale Municipal Property Corporation's allocation of some its 2013 bonds to refinance a lease agreement in connection with a garage adjacent to the largest luxury shopping mall in Arizona.
An IRS agent told the MPC, a nonprofit that can issue bonds on behalf of Scottsdale, Ariz., that the Service planned, to send it a "notice of proposed issue" as part of an audit of the $65 million tax-exempt excise tax revenue and refunding bond issue. A notice of proposed issue identifies areas of alleged non-compliance with tax laws or rules.
The MPC disclosed the IRS audit and planned action in an event notice posted on the Municipal Securities Rulemaking Board's EMMA System this week. The IRS began auditing the bonds in Feb. 3, 2014 and sent the MPC four information document requests, the latest one on March 23, according to the notice.
On March 12, the IRS agent informed the MPC that it would "challenge the allocation of a portion of the proceeds of the bonds to refinance the initial lease term of the existing municipal Scottsdale Fashion Square Partnership Parking Garage Lease Agreement."
"The city disagrees with the positions of the IRS" and "continues to discuss this matter with the IRS, and will respond to any further notices from the IRS as necessary," the notice stated.
Bruce Washburn, the city attorney, refused to discuss the notice.
But according to a city council report, published in January 2013, the city had entered into a lease agreement with the Scottsdale Fashion Square Partnership, now Scottsdale Fashion Square. Under the lease arrangement, the city would have use of the Nordstrom's Garage beginning in 1998 for 50 years. The total rent was to be $31.375 million to be paid in installments over the first 30 years of the lease, with interest accruing on the unpaid portion at the rate of 9.14% per anum.
The city was authorized by the city council in December 2012 to prepay the rent. After the city gave SFS notice of its intent to exercise the prepayment option, there was a dispute as to whether the accrued interest would be included in the final payment. The parties negotiated a settlement under which the city would pay the $31 million, but give SFS two credits against development fees, each $1.25 million, one that would have to be used within five years and the other within 10 years. The city also agreed to waive the purchase option, according to the city council report.
The coupons for the 2013 bonds ranged from 3% to 5%, according to the official statement, Gust Rosenfeld, P.L.C. was bond counsel and Piper Jaffray & Co. was financial advisor.
