WASHINGTON — The Village Center Community Development District in Florida, which the Internal Revenue Service insists is not a political subdivision that can issue tax-exempt bonds, is planning to price three issues of taxable refunding bonds next week for private placement.
The CDD is expecting to price about $172 million of recreational revenue refunding bonds on Tuesday. It is also planning to price two issues that pertain to its water and wastewater systems: about $70 million of utility refunding bonds relating to the Little Sumter Service Area System and about $15 million of utility refunding bonds relating to the Village Center Service Area System. These numbers are preliminary and subject to change, said district manager Janet Tutt.
They will be sold in negotiated private placements, with the bonds being purchased initially by Citigroup Global Markets, Inc.
The CDD's bonds, which were issued from 1998 to 2004, have been under audit by the Internal Revenue Service for years. In May 2013, the IRS issued a technical advice memorandum finding that the CDD is not a political subdivision for purposes of issuing tax-exempt bonds because its board is, and always will be, controlled by the developer rather than publicly-elected officials.
The TAM, which has been very controversial and opposed by some lawyers, led the National Association of Bond Lawyers to ask the IRS and Treasury Department for more clarity over the definition of a political subdivision. The audit of the CDD's bonds is continuing, and the IRS has not yet made a final determination about the tax-exempt status of the bonds.
Perry Israel, a lawyer representing the CDD in the audit, said recently that there are no new developments in the IRS dispute and no settlement. Tutt said the purpose of the refunding bonds is to "secure substantial savings" by refunding outstanding bonds with securities that have lower interest rates.
Because of the pending audit, the CDD can't issue tax-exempt bonds right now, she said, so it is issuing taxable bonds. If the CDD waited until the audit was resolved to issue refunding bonds, which possibly could be tax-exempt, "the window of opportunity for savings" may be closed, she added.
The new bonds will refund outstanding bonds that are part of the IRS' audit.
Proceeds of the recreational revenue refunding bonds will be used to refund outstanding bonds issued in 1998, 1999, 2001, 2003 and 2004. The proceeds of those bonds were used to acquire recreational and other facilities, according to the preliminary official statement draft included in the CDD's agenda for its Sept. 8 meeting.
The Village Center Service Area System utility bonds' proceeds will be used to current refund outstanding bonds issued in 1998 whose proceeds were used to acquire portions of the system. The Little Sumter Service Area System utility bonds' proceeds will be used to current refund bonds issued in 2003 whose proceeds were used to acquire portions of that system, according to drafts of the preliminary official statements included in the meeting agenda.
The bonds will not be registered. If the issuer is judicially or otherwise found to not be a political subdivision under federal tax law, it might not be viewed as a political subdivision for purposes of the Securities Act of 1933. As a result, the CDD would not be able to rely on the exemption from registering the bonds relating to securities issued by political subdivisions, according to the bond documents.
In order to make sure the bonds don't have to be registered, they can only be resold by the initial purchaser to "qualified institutional buyers," the bond documents state.
The preliminary official statements also warn that prospective buyers of the bonds should evaluate whether they can own the bonds if the CDD is finally determined not to be a political subdivision for purposes of the tax code and the Securities Act.
Standard and Poor's rates the recreational refunding bonds A and the two utility refunding bond issues A-plus. Fitch Ratings gives the VCSA bonds an A-plus rating and the LSSA bonds an A rating. The rating agencies' reports don't mention the IRS audit.
Akerman LLP is serving as bond counsel, Greenspoon Marder, P.A. is serving as Citi's counsel and Stone & Gerken, P.A. is serving as issuer's counsel.
