BRADENTON, Fla. — South Miami, has reached a closing agreement and settlement with the Internal Revenue Service over impermissible uses of tax-exempt bond and bank loan proceeds to build a parking garage.
As part of the settlement, the city last week defeased $1.72 million of Series 2002A bonds and $3.77 million of Series 2006 bonds. It also prepaid a $556,601 tax-exempt loan it obtained through Sun Trust Bank for the project.
The IRS was paid a settlement fee of $285,000, according to city documents.
South Miami obtained a taxable loan from Sun Trust to pay expenses related to the IRS settlement.
The city’s bonds were issued by the Florida Municipal Loan Council as part of two pool-bond offerings totaling $72 million. As part of the IRS settlement, the defeased bonds will retain their tax-exempt status, according to a notice the FMLC filed last week.
Potential problems with the use of tax-exempt bond and loan proceeds for the garage project surfaced last year when the Securities and Exchange Commission opened an investigation into the pool bonds focusing on South Miami’s portion of the borrowings.
South Miami and the FMLC then entered the IRS’ voluntary compliance agreement program.
The City Council gave a developer tax-exempt bond proceeds to build a parking garage, and then entered into a 50-year lease allowing the developer to operate the garage and retain its earnings.
The city also took out a taxable bank loan to make additional improvements but later refinanced the debt using a tax-exempt bank loan.
The 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 the city’s bond counsel, Squire Sanders & Dempsey LLP.
City officials could not be reached for comment by press time.