BRADENTON, Fla. – A south Florida county jail built largely for inmates detained by U.S. Customs and Border Protection plans to convert its tax-exempt bonds to taxable debt after running afoul of federal tax laws.
The Glades Correctional Development Corp. expects to exchange $28.3 million of outstanding tax-exempt bonds for $35.3 million of taxable bonds, according to a notice by the trustee, UMB Bank NA.
The conversion is expected to occur on June 5.
The Internal Revenue Service ordered the exchange after finding that the original $33 million of first mortgage bonds issued in 2006 violated the private activity use test of the IRS code.
Bond proceeds financed the purchase of 22 acres of land and construction of a 440-bed jail in Glades County to house detainees of the U.S. Immigration and Customs Enforcement and ICE staff, as well as inmates of the U.S. Marshals Service and the county.
An IRS analysis concluded that more than 85% of revenues for jail operations and payment of debt service came from federal agencies, “clearly meeting the private business use test.”
To preserve the tax exemption on past interest, the IRS ordered GCDC to issue taxable bonds and cancel the outstanding debt.
The June 5 exchange will be structured as $23.04 million of Series A bonds and $12.31 million of Series B bonds.
Both series will have interest rates of 7%, and maturities in 2030 and 2039, respectively.
The debt service reserve fund will be funded at its required amount of $2.5 million.
The automatic mandatory restructuring will be conducted through The Depository Trust Co., after which the 2006 bonds will be cancelled.
UMB said it received court approval to proceed with the exchange from the Hennepin County District Court in Minnesota on May 5.
The new debt will cure various defaults that have occurred since 2014, including missed principal and interest payments.
Robert DeMann, chief deputy for corrections with the Glades County Sheriff’s Office, did not immediately respond to a request for comment.
The jail struggled financially because of by low occupancy rates due to unanticipated reductions in ICE prisoners. Since last fall, however, the number of alien immigrant detainees has doubled, improving revenue collections.
Last month, the average daily total population at the lockup was 452, or 85% of capacity, according to GCDC reports.
In April 2016, the average daily number of inmates was 200, or 37% of capacity.
A northwest Florida jail has also received an adverse determination about its bonds from the IRS.
The Baker Correctional Development Corp. has said that the IRS reached a preliminary determination that its $45 million of first mortgage revenue bonds issued in 2008 are taxable.
Bond proceeds were used to purchase 90 acres of land and build a 512-bed jail. Baker’s bonds have been in default due to occupancy issues similar to those experienced in Glades County.
On Monday, UMB Bank – the trustee for Baker Correctional - said in a notice that it has filed a petition in Hennepin County District Court to request that the court approve an exchange of its $35.5 million of outstanding bonds for $36.3 million of taxable debt.
A hearing on the petition is scheduled for June 7.