As part of an ongoing initiative to examine developer-driven deals, the Internal Revenue Service is auditing $48.47 million of defaulted bonds issued by the Stoneybrook South Community Development District in Florida in 2007 for infrastructure improvements.
Cliff Gannett, director of the IRS’ tax-exempt bond office, said last year that the IRS planned to continue auditing multifunctional special district financings in 2011, having begun them last year.
Stoneybrook disclosed the IRS audit of its bonds in a material event notice filed with the Municipal Securities Rulemaking Board’s online EMMA system. The notice was dated Jan. 25 but did not appear on EMMA until late Jan. 27 or early Jan. 28.
The IRS informed Stoneybrook of the audit in a Jan. 14 letter, saying it was part of its initiative to determine whether developer-driven financings comply with the tax laws and rules.
“At this time, we have no reason to believe that your debt issuance fails to comply with any applicable tax requirements,” the IRS told the district.
WesleyHaber, an attorney with Hopping Green & Sams, which represents the district, said he has no reason to believe the bonds are not in compliance with tax requirements. Haber contends the bond-financed project was a victim of the recession.
The IRS sent the district a four-page request for information and documents, including the bond transcript, appraisals or valuation reports related to the financing, details of how the bond proceeds were invested and spent, individuals on the district’s board of supervisors who were also employed by the developer, and landowners.
The IRS also asked for information about debt-service payments, costs of issuance, computations of bond yield and any qualified guarantees, unscheduled draws on reserves, delinquent debt-service payments, and the names, addresses, and social security numbers of all known bondholders.
The debt — $39.25 million of eight-year bonds, and $9.22 million of 32-year bonds — was issued to finance roads, storm water management, water and sewer, and landscaping on about 900 acres of land on which a master-planned residential community was to be built about 20 miles from Orlando, according to bond documents and Haber.
The project was to include 3,200 residential units, an 18-hole golf course and club house, a recreation center, fire station, parks, and a school site.
The bonds were secured by special assessments on property owners, initially the developer, South Development LLC, a Florida limited liability company, and later when housing was sold and facilities developed, by homeowners and other property owners.
Haber said most of the bond proceeds were used for infrastructure but the developer was unable to develop the site.
In October 2009 the district charged the developer was delinquent in the payment of $46.46 million of assessments and threatened to foreclose on the property. It eventually sued the developer andthe litigation is still pending in a state court.
In November 2009 there were unscheduled draws on debt-service reserve funds.
Last June the district declared the bonds were in default.
The underwriter for the bonds was Prager, Sealy & Co. Bond counsel was Akerman Senterfitt. Underwriter’s counsel was Greenberg Traurig, PA.