BRADENTON, Fla. – Moody’s Investors Service said a recent Internal Revenue Service memorandum that affects the tax-exempt status of the Village Center Community Development District in Florida will not impact the agency’s ratings on 134 CDDs and special-purpose districts.
The IRS, in a technical advice memorandum, said that the Village Center CDD is not a political subdivision pursuant to IRS Code, making it ineligible to issue tax-exempt bonds. Moody’s does not rate the Village Center.
The memorandum prompted Moody’s to review the bonds it rates that were issued by special districts and CDDs in Florida and other states to gauge the likelihood that they’d be subject to the IRS determination, the rating agency said in a special comment Aug. 2. Those include entities that issue land-secured bonds backed by ad valorem taxes and special assessments.
“We have concluded that the land-secured bonds we rate are likely to be considered political subdivisions and therefore not at risk of a loss to their tax-exemption status on this basis,” said Moody’s analyst Coby Kutcher. “Even if a special-purpose district were to lose its tax-exempt status, the direct credit impact would be minimal because they mostly issue fixed-rate, amortizing debt.”
In order to issue tax-exempt bonds, issuers must demonstrate to the IRS that they are a division of state or local government, and thereby accountable to a public electorate.
“The IRS ruled that the Village CDD was not a division of state or local government because it was organized to perpetuate private control and evade control by a public electorate,” said Kutcher. “The Village [Center] was structured as a commercial district governed by a board that was consistently controlled by the developer of the district.”
Because of its commercial nature, the Village Center never acquired residents for a public electorate to elect a governing board.
Moody’s rates districts that are organized differently than the Village Center, with characteristics that distinguish them as political subdivisions.
“The majority of issuers in our rated portfolio are residential districts governed by boards, which are elected by residents of the district and subject to term length and consecutive term restrictions,” Kutcher said.
In many cases, the developer initially controls the board, but the control is transferred to community control as residents move to the district.