The Village Center Community Development District of Lake County, Fla., has been notified by the Internal Revenue Service that $64.3 million of recreational revenue bonds issued in 2003 to finance the acquisition of golf courses, parks, and facilities for the Villages retirement community may be taxable.
The district and the related Sumter Landing Community Development District disclosed the audit, not only to the holders of the 2003 bonds, but also to bondholders for three similarly structured transactions, even though those deals have not been audited.
The disclosures were made in material event notices issued last week for the 2003 bonds, $50.6 million of subordinate recreational revenue bonds and $38.5 million of recreational revenue bonds sold by the Village Center CDD in 2004 and 2001, respectively, as well as $65 million of recreational revenue bonds sold in 2005 by the Sumter Landing CDD. The notices were filed with the nationally recognized municipal securities information repositories.
In the notices, the districts emphasized that they are unaware of any audits or planned audits by the IRS on the 2001, 2004, and 2005 bond issues. They said they are only issuing the notices because the bonds share "certain similarities" with the 2003 bonds that the IRS has preliminarily found taxable.
There are 580 other community development districts in the state, according to the Florida Department of Community Affairs. But it is unclear if the Village Center CDD's 2003 bonds are similar to, or unique from, the other such district bonds in the state.
The IRS sent the Village Center CDD a letter on Jan. 23 that identified three concerns with the 2003 bonds. The agency claimed the Village Center district does not qualify as a political subdivision or as an "on behalf of" issuer of tax-exempt bonds. It also said the appraisals do not support the price paid by the issuer to the developer and the sales price is not a governmental use of the proceeds. In addition, the agency said the bonds are private-activity bonds, which are not tax-exempt because they are not "qualified."
The IRS letter comes after the agency in 2003 audited similar bonds issued in 1998 by the Village Center CDD, but closed that audit without taking any action. The agency, however, told the issuer it was reserving the right to reopen the audit if new information emerged.
Michael Williams, a shareholder with Akerman Senterfitt, which served as bond counsel on all of the deals, said: "Clearly, myself and the district thought by the letter that we received in 2003 that this has been dealt with, so we're a little caught by surprise." He added that the district intends to work with the IRS to preserve the tax-exempt status of the bonds.
The IRS letter also comes after the agency announced in December that it is conducting a research project on CDDs that could result in audits if noncompliance is suspected.
A 1980 Florida law permits developers to create community development districts in order to finance public infrastructure projects with tax-exempt debt, according to bond lawyers in the state.
The bonds can be issued either to finance the construction of new infrastructure projects, or to purchase existing projects financed by the developer. Debt service on the bonds typically is paid for by residents of the development. They pay fees to the developer in exchange for use of the facilities.
The bonds issued by the Village Center and Sumter Landing CDDs were all underwritten by Prager, Sealy & Co., with Akerman Senterfitt serving as bond counsel.