BRADENTON, Fla. — South Miami is seeking a taxable bank loan to fund a settlement with the Internal Revenue Service over impermissible uses of tax-exempt bond and bank loan proceeds to build a parking garage.
On Monday, the city released a request for taxable loan proposals for $7.6 million to be repaid over 15 or 20 years. Proposals are due June 29.
The loan will be used to refund $1.725 million of Series 2002A bonds, $3.245 million of Series 2006 bonds, $556,603 of an outstanding 2009 tax-exempt loan from SunTrust Bank, and to pay a settlement of $290,842 to the IRS, according to the RFP.
The bonds were issued by the Florida Municipal Loan Council as part of two pool-bond offerings totaling $72.14 million and sold on behalf of 16 borrowers, including South Miami.
The city used the bond and loan proceeds to build and make improvements to a municipal parking garage over a number of years.
The City Council loaned bond proceeds to a private developer that built the garage, and then entered a 50-year lease with the developer to operate the facility.
“Those two actions constituted an impermissible private loan and impermissible private activity” under the IRS Code of 1986, “adversely affecting the governmental status of the council bonds,” according to a May 11 memorandum prepared by Todd Cooper, a partner and public finance tax specialist at Squire Sanders & Dempsey LLP, which was hired by the city.
Investors were first informed about potential trouble relating to the tax-exempt status of the bonds last year when the Florida Municipal Loan Council filed a notice about the opening of an inquiry by the Securities and Exchange Commission on the Municipal Securities Rulemaking Board’s EMMA website.
The SEC alleged that “in the underwriting, offering, sale and purchase of the bonds that there may have been made false statements of a material fact or a failure to disclose material facts concerning, among other things, the tax-exempt status of the bonds,” according to the notice on EMMA.
The SEC demanded all documents, agreements, financial statements, communications, and legal and tax opinions relating to the city’s downtown garage project, as well as information exchanged between the FMLC and the city in connection with the bond sale.
The regulatory agency also took testimony in the case.
Subsequently, the FMLC and South Miami entered the IRS’ voluntary compliance agreement program to negotiate a settlement and preserve the tax-exempt status on a portion of the bonds.
South Miami’s 2002 bonds are currently outstanding in the amount of $5.414 million, while the 2006 bonds are outstanding in the amount of $5.250 million. Another $834,900 is outstanding on the SunTrust loan, according to Cooper’s memo.
The City Council on May 26 approved a resolution authorizing staff and members of its finance team to seek taxable bank-loan proposals and complete settlement negotiations with the IRS.
First Southwest Co. is the financial adviser assisting South Miami in structuring the loan.
The FMLC said last year that it had sold well over a dozen pool bond issues since 1998-99 and the South Miami case was the first time any pool bond proceeds had been called into question.
Most of the Florida Municipal Loan Council bonds have underlying ratings of A-minus from Standard & Poor’s, including the Series 2002A and 2006 bonds.
The city of South Miami is primarily a residential community with roughly 11,000 residents located in the middle of Miami-Dade County.
The city does not have underlying ratings and primarily borrows through the FMLC, which is administered by the Florida League of Cities Inc.