Bond issue today $355m due
 

The Orlando Sentinel front page says $355M due per IRS. It also says towards the end, half of the amenity fee is paying off bonds. The amenity fee amounts to $33,000,000 a year. What does this mean for individual villagers???

Here is a link for those that do not get a hard copy.

http://www.orlandosentinel.com/news/...,5054493.story

Buyers notified?
 

Do buyers have a right to know about this bond issue before they make an offer? Seems like they should. Have any recent buyers been told by the realtor?

More details on $355 million bond fiasco
 

folks,
my name is lauren ritchie, and i am the orlando sentinel columnist who has been watching the progress of the IRS examination of the village center district (and now the sumter landing district) bonds.

the news story on the latest developments is posted at the sentinel site at www.orlandosentinel.com/lake

there, you can find links to the news story, my column which tries to look a little ahead in the process (this may answer your question, conn8757) and the actual documents sent to the district by the IRS. they are a fascinating read, and i recommend looking at them.

also, i've posted a blog item that deals with the response of charles smith, a villages resident who is the chairman of the village center district board of supervisors.

that link is http://www.orlandosentinel.com/laurenonlake

i notice that someone asked whether bond buyers are being notified of the problems with the bonds before purchasing them. i do not know the answer, but i can tell you that the village district has done the right thing by notifying the standard reporting agencies of problems with the IRS. whether investment advisors know of/pass along those notices is not something i can answer. perhaps you have some retired investment advisor who can get on the forum and tell you.

if you read the article and column carefully, you will realize that this is but a step in the process. however, it's a step that tells you a lot about where the IRS is headed with this investigation.

i invite your comments on the column and on the blog. i'll also check back here later today and try to respond to anything posted here. at the moment, i have five wide-open acres just screaming to be mowed.

lauren ritchie

one other tidbit
 

jimjoe,
i misunderstood your point. you were asking whether home buyers rather than bond buyers have the right to be notified about the IRS examination before purchase.

i am guessing, but i am pretty sure the answer is no. i would hope that folks who are going to invest such a substantial amount of money would do a little work on their own and make a judgment as to whether they think this is a material problem.

perhaps a real estate agent will correct me if i am wrong.

lauren

Typical, overblown, anti-Villages story from the Orlando Sentinel. I'm not "outraged" by this single investigators report.

Ms. Ritchie is correct in that "this is but a step in the process."

In situations like this, it doesn't matter if you are right or not. It becomes a matter of "is the fight to prove you are right worth the cost of litigation?" Quite often, settlements occur simply to close the matter because being right is less important than being solvent. Insurance companies do this all the time. So don't businesses which get sued all the time (e.g., drug companies) just to keep a lid on overall costs. Dealing with the government is no different, whether it is a tax matter or other matter where there is any possible fiscal penalty.

We've all been there, such as the parking ticket where the meter was broken, but it was cheaper to pay the ticket than fight it, knowing the costs would escalate in court. It's not fair, but it is what happens.

Whatever happens....It's a beautiful day in The VIllage today!

I do not know Stephen Hudak, but the tone of his article is more "editorial": than "news". The colorful language in the first paragraph makes me belive he is jealous of anyone living in The Villages. Maybe it is just me. Maybe I should be grateful that someone is looking out for me. Oh well, I am going golfing.

Potentially extremely serious issue
 

Lauren-- Thanks for reporting on this issue. The Villages Daily Sun has completely abdicated its responsibility as a news organization by not covering what is clearly the most important issue facing Villagers today.

To the contributors who are attacking you as the bearer of bad news, I suggest that they actually read the latest IRS correspondence, think about the magnitude of the potential Central District and Developer liability, and start considering the consequences to Villagers if the IRS prevails.

What consequences are those? I have yet to see anything from anybody that identifies a "consequence." Getting folks worried over speculation does no good except for Valium salesmen.

Until someone can honestly state a specific consequence to a homeowner - and make that statement with authority and knowledge to back it up - then it's just backyard gossip and handwringing for no reason other than being "Chicken Little."

the burden lies with the developer and not residents period

SteveZ...thanks again for your usual common sense response.

:agree: :agree:

As usual, SteveZ's cool comments should prevail!

SWR
(also a Steve!)

:bowdown:

Hopefully, SteveZ's cool comments will prevail.

.

This issue certainly seems like something the Daily Sun should at least cover, just to give updates to homeowners. Not reporting on it can potentially generate a lot of misinformation.

Chump change
 

http://www.orlandosentinel.com/laurenonlake

Click on this link in Lauren Ritchie's response you will see an exchange between the IRS and a Mr. Israel who has POA for the vccdd's it's quite long but at the end of the exchange,bottom line is the IRS is willing to settle the whole matter for $ 16,458,454 chump change in my opinion.Please remember I am not a lawyer,so correct me if I am mistaken :shrug:

Daily Sun Saturday May 30, 2009. See Section C, Page 1.
The staff report gives the updated facts....no hype, guesses or opinions.

Well since you asked the question, let’s take a look at what’s on the table right now.

Based on the IRS letter date 05/18/09, Agent Dominic Servadio has made a specific proposal for The District/Developer to consider to bring the whole matter to an end. But it’s nothing more than a starting point for negotiation between the IRS and the Developer and the two districts that he owns and controls. Additionally it contains a caveat that implies that if the District/Developer chooses to elevate this to Appeals, then the IRS will open up other related bonds to detailed examination, something that the IRS probably knows the Developer would prefer to avoid. A veiled threat indeed.

So if the District/Developer decided to settle on that basis (which is doubtful at this point) the Developer would re-purchase the golf courses and other amenities to the tune of 355 million dollars that he sold to the District, and the District would turn around and payoff the bonds. This would reduce the amenity fees from an average of $130/mo to maybe $95/mo.

On the other hand, if the amenity fee was kept at the current rate, it would provide some $16 million/yr to improve the current amenities. Perhaps reopening the indoor pool or widening and refurbishing the multimodal cart paths north of 466, without regard to the districts that they wind through and other improvements as noted by the IRS agent.

And before everyone assumes that the IRS is out to get you, the TV homeowner, think again. If you actually read all of the points and counterpoints made in the documents that are on-line and available to you (as Ms. Ritchie has suggested) you may in fact come to the same conclusion that I have. And that is the IRS has it’s cross-hairs focused right on the Developer and his family related trust funds that were the direct beneficiaries of these transactions, not on TV homeowners or the thousands of investors in these federally tax free muni-bonds.

Here are some of the reasons why there won't be a "consequence" for TV homeowners:

1) If, worse case scenario, the IRS will finally only settle for some payment, Mr. Morse will likely pay it to resolve the matter completely and prevent other transactions from being subject to review. (so many cans of worms!)

2) If Mr. Morse tries to pass the payment on to residents in any discoverable way, the POA will file suit. (Thank God for the POA!)

3) As in the last suit against the Developer, the POA will have a tremendous case. The IRS findings will be irrefutable arguments: that the districts which issued the bonds are not really governmental and the fact that the homeowners are paying 16m in annual interest payments to repay bonds which allowed the Developer to realize extraordinary profits. (It's a no-brainer Judge!).

4) Number 3 means that Number 1 is what's likely going to happen. (Mr. Morse is smart!)

Hey, what do I know? But I feel pretty comfortable, and I think you should too.
Have a wonderful day!

Per EdVinMass: "So if the District/Developer decided to settle on that basis (which is doubtful at this point) the Developer would re-purchase the golf courses and other amenities to the tune of 355 million dollars that he sold to the District, and the District would turn around and payoff the bonds. This would reduce the amenity fees from an average of $130/mo to maybe $95/mo."

I'm guessing that the golf courses are the free for life executive courses, the other amenities are the free rec centers, pools, courts, etc.

If they revert to the developer and the amenity fees are back to $95/Mo, does the $95/Mo cover the use (not purchase) of the free amenities?

.

Whatever the outcome, negotiations of merit do not occur in the media.

You're mistaken about Morse's liability
 

Folks,

I have been reading the posts that assume the golf courses, ect., will go back to the developer in the event the bonds are recalled. That is completely in error.

The devleoper has zero liability in this transaction. He is simply a seller to the governmental district. Morse made his money, and on his sub S corporation tax return, he declared $53 million profits and paid taxes on it. That information was contained in previous IRS documents, noting that what he did was proper.

The developer is not in any way legally considered as the district. Even the IRS has not attempted to prove that. What the agency has tried to show is that the developer has enough influence over the district that the transactions were not "arm's length" and therefore do not qualify to be paid for with tax-exempt bonds.

This was a business deal between a legally constituted government and a legally constituted business in the state of Florida. When you try to run the scenarios that may be possible, this is a vital thing to consider. I can understand how people get confused -- The Villages has fostered the father-developer notion for years. But it's not legally accurate.

Realize that Morse did not issue these tax-exempt bonds. The board of supervisors of your district government did. Whatever consequences there are will be borne by the district government -- unless Morse choses to get involved. The question really is whether he will find it enough to his advantage to do so or whether he will decide it is in his best interest to walk away.

Lauren

If the developer had influence over the districts and the districts were incorrect to issue tax exempt bonds, how does the developer have zero liability?

.

A good question but the answer may be unfortunately .. because the IRS goes after the seller of the alleged improper bonds, which is apparently the villages government who get its money from the amenities fees or from taxation of villagers,,,, not the person who was paid with the money raised by the bonds. IT may be an important question for the POA to consider if the residents suffer any adverse consequences from this unfortunate situation... but if this type of arrangement is authorized by Florida law it may be there was no wrongdoing.. and the villagers could end up paying the bill... Job security for lawyers.

I read a lot of this information. Seems the risk is if these bonds are not tax exempt, but the interest is subject to IRS tax, then the rate which the CDD is able to sell these bonds goes up. Instead of a 4 to 5 % interest rate it goes up to 6 to 8% rate. That would increase your annual bond payment because your paying a higher interest rate. As to what happens to the past interest collected as tax exempt someone will pay higher taxes then they thought for a lower rate of return received. I am sure lawyers will be very involved with that decision and would somehow try to make that come back to the CDD which sold it as supposedly tax free interest which now is not. Then the question becomes would that get passed back to the homeowner. If it does your payment goes up for the bond portion of your annual payment. Probably not a huge amount to all of us, but an amount to pay the 2% delta that usually becomes a premium for tax free vs taxable. How much gets charged retro active is up to the lawyers and the IRS.

So is there homeowner risk? I think the answer is yes. Is it substantial? I don't think so. Probably worst case would be $700 to $800 per homeowner paid over time by the time you include lawyers, IRS penalties and interest.

And we are still back at "what consequences?"

People can "what if" the situation to death, and still be wrong. If the IRS and TV negotiate an arrangement, that's business. It happens whenever a business wants to cut its costs in defending an action, and the IRS knows it. If there was true "bad faith" here, the matter would be in the hands of the U.S. Attorney's Office, not the money-collectors.

So, the matter will continue until it ends. If the TV "government" made a mistake, why is that a surprise? Has anyone ever lived anywhere where the local government didn't make mistakes which either raised taxes, impacted services, or caused layoffs? Why is there an expectation that the TV government would be "perfect" in every way?

The lawyers for TV and the IRS will resolve the matter, because neither side wants to look stupid in public, and whatever the arrangement is (from dropping the matter to settlement at $___) , both sides will issue statements to their advantage - - and t matter will be "old news" in a day.

Maybe I'm living in a fog, but I just don't see anything happening which will cause me to change my style of living here. Let the games continue...

I have been reading about this for several months now. I am in agreement with Steve.
Here is one point that I have not seen addressed. When a entity sells tax free bonds they hire Bond Consul to make sure things are on the up and up. If the sold bonds were declared taxable I would think that the Bond Consul firm would be on the hook so to speak as would the insurance firm that insures the Bond Consul firm against errors and omissions. All so the IRS ruling will have statewide impact over all the other CDD. The point is that there are many deep pockets ahead of Village residents. There is enough here to keep several Law firms busy for years.

bond issue today $355m due
 

Thank you Lauren for you information - I for one like to hear what is going on and with the bond issue. I not like some people do not chose to bury my head in the sand

No one is assuming anything here. Just speculating on possible ways in which this could be resolved. It's not as much about what he can or cannot be compelled to do but more about what he probably should do to clear up the mess that he created.

If you feel strongly about this, then why at the same time that you posted this here did you post the following statement in your column today:

"What is conspicuously absent from the revenue agent's scenarios is what role Morse might have in this, if any. The agent spent considerable time and energy building a case that the developer is the district, and the district is the developer. If so, shouldn't the developer — the biggest beneficiary in this arrangement by far — bear some responsibility? Or is he absolved by declaring his profits from the bonds as taxable?"

No, it's Morse's government not the homeowners government(s) that issued these tax-exempt bonds. The two CDD's under scrutiny here were established under chapter 190 by virtue of the landowners of Real Property physically located within the boundaries of those two CDDs. And absolute control of it remains with the owners of record which, under Chapter 190 can (and does) include private corporations and trusts. And that clearly is the Morse family aka The Developer and can be identified by the land owners of record in the Registry of Deed of the counties in which they reside. The homeowners in The Villages and the numbered CDD that their property is a part of, do not own so much as one square inch of the real property inside the boundaries of the VCCDD or SLCDD.

But ironically, due to the nature of this unusual governmental structure, those two special CDDs cannot foist their tax woes immediately onto the homeowners in The Villages. Those two special CDDs have no taxing powers over the numbered CDDs and only real source of income is the amenity fee whose annual increase is capped at the inflation rate.

EdvinMass

Thanks for the post I apprecaite you insight. My attitude to this is similar to any IRS issue, they make claims (usually very large), you refute with documentation, they negoitiate or go away.

Kind of reminds me of the schoolyard bully.

Lauren,

Since you appear to be the most knowledgeable on the subject at this time who is supplying us information, using your non-legal best guess is there any conflict between Florida law that established the VCDD (S) throughout Florida, and the preliminery IRS determination that the closeness between the Developer appointed supervisors and the "government-like" VCDD is what is putting the tax-fee status in jeopardy?

My understanding is that through the years the Florida Courts have sided with the Developers ability to choose the supervisors despite the obvious conflict of interest. If I read this correctly then is there a possibility of a state vs. federal conflict and a supreme court challenge? or am i reading a heck of alot more then is necessary in this issue?

If so, can the Developer retroactively allow residents to choose the supervisors today and thus make the past bonds "tax-free"?

your thoughts please

edvinmass,
to clear up the questions of the developer being the district and vice versa.

the IRS has been trying to prove the developer IS the district in the sense that he exerts considerable control over it, not that he is [I]legally[I] one and the same entity. the IRS' attempt to prove that is in the context of whether these are 'arm's length' transactions, not whether the district and the developer are legally the same critter.

legally, they are separate entities, and i don't there anyone has raised a question otherwise. hope that helps on that issue.

ed, you are totally correct that the two powerful CDDs do not have ad valorum taxing power outside their geographic boundaries and that their only real source of income is the amenity fees, which they receive because they've bought the rights to receive them. the amounts of amenity fees, i believe, are tied to the consumer price index by a covenant in your deeds.

one last thot -- i don't disagree with your common sense conclusion that the district and the developer are one, even tho i know that legally they aren't. however, don't let janet tutt hear you say that the district is morse's government. she will chop your tongue off. the district very carefully preserves the distinction that the developer and the district are totally separte -- which, of course, is totally what the developer wants. the last thing he needs right now is for someone to prove that they are one and the same.

opus - regarding the bond counsel that gave the opinion that the bonds are A-OK. you are right on. that is one of the things that bond experts i've been talking to all week are buzzing about. of course, it's not automatic...someone has to take them to court. the one thing you have to realize is that this proably will not affect other CDDs. i don't know of any others in florida that have "perverted" the law (to us the IRS agent's phrase) in the way that these have to enrich the developer. the irregularities are what attracted the IRS to these bonds, along with the blue sky purchases.

12rideHD -- you have hit the main issue on the head. what the IRS is trying to force is for the CDD to issue taxable bonds. however, your spread may be a little off. the bonds experts i've been on the phone all week with are saying that the district may end up paying a pretty serious premium for past transgressions -- IF they can get money in the market. however, by the time this shakes out, the market could be in better condition. let's hope.

chuckinca -- you ask if the developer had influence over the district and the district issued the bonds, why isn't the developer liable? jimjoe who responded is correct. what we've been discussing here is tax liability, not general liability. morse bears no TAX liability because he is a separate legal entity. he paid his taxes on profits he made from the sales. if this were to somehow come back on the homeowners and they sued, the question of whether the developer might be liable in court is a different one.

my guess is that it all boils down to whether morse wants to keep developing here. (he does have another 'downtown' district already approved and ready to go). if he wants to keep going, i suspect he's going to have to step up in some way and help settle this. if not, i think he could walk away without fear of repercussion, at least from the IRS. (remember -- he paid taxes on gains from the sales) what the homeowners might do is another issue. this all comes from that oh-so-convenient (for morse) arrangement where he gets to control a government of his own, including perks that go with it like tax exempt bonds. that's the "perverted" part of this to which the agent referred. others CDDs in florida have migrated the power of the governmental district from the developer to the homeowners.

hope that all helps.

steve, sorry if we're boring you. i realize your interest in this is your pocketbook and lifestyle. other folks, however, have broaders interests in it, including some pretty fascinating public policy questions if you're intrigued by that sort of thing. i'm pretty much of a political science junkie, so i find the whole situation with its tentacles nin private/public partnerships worth consideration. it's certainly unique situation, even though districts such as this one exist elsewhere, such as calfornia. i'm looking at some of those this week and will write something if i find anything that might have a bearing on this particular situation.

Feds versus state...
 

Stantheman,

there's no "conflict" between florida law and federal law because they address different things.

florida law creates a community development district and gives it power to issue bonds. i do not believe the law says does not say "tax exempt bonds."

the federal tax codes specify what makes a bond issue meet the test of "tax exempt." the IRS is applying the code to this issue and saying that it doesn't meet the test.

the district's defense is that it is a government under florida law and as such, it should be able to issue tax-exempt bonds.

the IRS says that argument is specious. its response: 'well, you might be a government under florida law, but state law doesn't matter to us when determining whether bonds are tax exempt. the two do NOT necessarily go together.'

that is what the agent meant when when he declared that the district's attorney archie lowry had made an "irrelevant" argument.

the IRS has a set of tests that it applies to any bond issue anywhere in the united states. pass, and it's tax-exempt. fail and it's not.

so, at the end of the day, these bonds could be declared formally as taxable and the district is still just as much a valid government under florida law as it was yesterday.

hope that helps.

--lauren

I've been reading this thread with a lot of interest. Although I don't always agree with Ms Ritchie's editorial slant, it appears she has done a lot of homework on this topic. I agree with SteveZ..only time will tell.

A couple of other points to ponder...

1. The 2003 tax exempt recreation bonds in question were probably issued at 6+%; If they had to be paid off now and re-issued as taxable at today's bond market rates, they might go out at 5%; the net result to a bondholder is probably a wash. 6+% tax exempt interest is probably equivalent to 5% taxable. And, wouldn't the central districts benefit by issuing bonds at lower rates?

2. The bigger issue to me, beyond taxable vs tax exempt, is the nature of the transaction...i.e. the value the central districts and developer put on the amenities being sold to the district. These certainly don't appear to be arms length's transactions and the price paid is so far above the cost to construct that it does smell fishy. And, since the supervisors are the developer's people, the residents get no say so in the transaction.

3. Lastly, and this may be petty.... but Agent Servidio works out of an IRS office in Salisbury, MD a small city on the eastern shore of Maryland about a 100 miles from DC. Not to belittle him or his office, but, I find it hard to believe that he or they will have the final say so in this. The Morse family has a lot of powerful allies in Washington (not as many now as they did a year ago) so I tend to believe someone higher up in the bureaucracy will quash this.

Ms. Ritchie,

On the contrary. This is far from boring, but is still a matter of considerable conjecture.

What is surprising is "why now?" regarding these bonds, which were issued several years ago, in broad daylight, in full public view, and with IRS visibility? What has changed in the last 5-6 years to make this matter, especially well after-the-fact in the bond sale, important now versus then? It's not that IRS is any "smarter"or that the bonds have morphed into something other than what they were advertised to be, or that The Villages' structure is any different now versus then. Is there a political reason why this is now coming forward?

In all of the information on this matter, and I may have missed reading some things along the way, I haven't seen anything regarding the above questions. As a "political science junkie," it would seem the prior questions would be of interest.

And yes, "pocketbook and lifestyle" are important to many retirees. Getting out of the rat race brings with it a lot more focus on those things. In fact, both are so important that if you and yours desire to roam north a few miles to Lake Sumter Landing some evening, the first of the $1.75 Margaritas are on LindaZ and me.

Controlled tempermant vs. Denial
 

Panic over the on-going Villages CDD vs. IRS issue is certainly not adviseable, but neither is an attitude of becoming totally disconnected with events that could potentially impact your life.

It just amazes me how some look at hundreds of millions of dollars in possible CDD liability to satisfy the IRS as if it's a mere check for dinner at a local restaurant.

Again, we see examples of the automatic, knee-jerk "disgruntled reporter" response to information being provided by the fourth estate, as is their responsibility. Do these reporters have axes to grind with all of the subjects and/or individuals they write about. I don't think it's possible to manufacture that many axes.

IMHO, being informed and making rational decisions is a great balance. Making off-the-cuff, unsubstantiated insults because the news may not suit you is not a rational exchange.:cus:

First of all, there is no "hundreds of millions of dollars in possible CDD liability" here. At the greatest possible extent, there is tax on bond interest, and that is truly negotiable as IRS' hands are not squeaky clean here. Call of the bonds, and reissue as taxable has a cost, but in today's market, bonds are popular.

What has been at the crux is the presentation of the information in a manner which inflames and creates (albeit unintentional ) a measure of panic among a target demographic. There is a distinct difference between "fact presentation" and a columnist's license to interject opinion within a writing. While the columnist has been professionally correct in her actions, that does not discount the fact that people have been frightened at a time they hoped to have achieved their greatest security. Again, there's a significant difference between "news" and "commentary."

Is there anything to be frightened of? I guess that depends on the person, and the facts, and the real consequences ( not the insinuated ones). To each their own, and to me (and speaking only for me) there is nothing that has occurred which has shaken my decision to move to TV or to continue living in TV. As nothing has appeared to have been done with "bad faith" or "criminal intent," - and if there was, the warrants (search and arrest) would have already been served - then its one of those "stuff happens" despite the best advice from competent counsel. What is lousy (and mighty peculiar) is that, for whatever reasons, this becomes an IRS matter so many years after the bonds were issued and sold.

I think if they ever allow Villages voting for district (what ever they call themselves) reps, Steve Z should be elected.

I'm too politically incorrect for almost everyone (but my dog likes me)......

Can you elaborate on why the IRS' hands are not squeaky clean? Is it possible that the IRS agents back in 2003 could have been pressured to "back off" of this investigation then? If I recall, the IRS, while supposedly not finding direct violations, did hint that they still had concerns about how these bonds were being issued?

I too, have not been concerned to the point where I would leave TV. but I would never assume it's impossible that much more in the way of $ could be at stake in the future, especially if this becomes a "urinating" contest between the two parties.;)