Good post Rubicon. This would allow current residents to better understand "worst case/best case" scenarios, and the possible financial implications. Having said that, I can understand that the Developer doesn't want to publish any information that could possibly lessen the enthusiasm of prospective purchasers. Although I personally think the demand will always be there for this beautiful retirement community.

Thank you for that link.........I just printed out the IRS letter to the attorney.

The Villages Florida Book also has:

Breaking: IRS Rules Against the Villages............

After a 5 year investigation into how the CDD borrowed money, in a memorandum dated May 30, the IRS says:

"WE believe that an entity that is organized and operated in a manner intended to perpetuate private control, and to avoid indefinitely responsibility to a public electorate, cannot be a political subdivision of a State."

Anyway, it's a lot to read...........plus many comments.......

No one, and I mean no one, really knows. There are so many players in this game besides the homeowners. Bond holders, lawyers, certifying agents, central districts, developer, IRS. Unfortunately, there is no direct voice for the homeowner involved.

IMHO, there is also no DIRECT liability for the homeowners. But central district funds are being expended in this fight and a loss for the central districts could threaten the amenities we enjoy. I'm glad we have the POA watching the progress of this dispute because I'm not confident the VHA or Sun will give us unfiltered news.

If you want official information regarding the Districts position on various subjects you should be checking the Districts Our Place publication here: VCDD Our Place Archives

You can even have updates sent via email if you wish.

That said, as far back as this June 2009 issue, Janet Tutt, spokesperson for the Center District (and therefore the developer who controls it) stated:

“Although I can not address all the rumors, the one that is most disturbing floats the possibility that an adverse ruling would somehow result in increased amenity fees or assessments. That is absolutely false. Neither amenity fees, nor resident assessments could be increased for such a purpose.”

I do not think that the developer will say anything unless sales of homes are threatened. I know that when my husband and I come for our lifestyle visit that we will be asking about the ramifications of this IRS decision. I want to know if the decision goes against the developer, what will the residents be liable for? Will any costs to settle this be imposed on the residents? Will there be sufficient money to maintain the amenities? I am moving here for the amenities. If they go to pot, I don't want to be here. I want an answer to these questions in writing.

We looked at TV about 7 or 8 years ago and ruled it out because the developer was never going to leave. No 55+ community we looked at had the developer controlling the community forever. We looked in TX, FL, AZ, NV and CA. We thought the the folks that moved here were giving up their rights and souls for free golf.

Now our son has moved to Orlando and we a considering TV again. If the developer would leave at build out, it would sure make our decision a lot easier. Making money for innovation, hard work, and risk taking is fine. It's the control the Morse family will not give up that is disturbing to me.

Sorry this got so long winded. I really would like to move here but I am really getting scared.

Could someone PLEASE enlighten me as to who the beneficiary of this tax free money is/was???

We love The Villages butI never thought that I was giving up my soul for free golf. The Villages us not for everybody. Please consider carefully:pray:

The quote by Ms. Tutt is generally true, because: (1) The Center Districts cannot tax outside their boundaries, no residents live therein, and, therefore no residents can be assessed taxes by those Districts, and (2) the amenity-fee increases cannot exceed CPI increases (however, maybe the amenity fees would not be increased to the maximum in the absence of bond-related costs). However, Ms. Tutt (perhaps unintentionally, but maybe not) is dodging the real question: If the Center Districts incur huge costs as a result of the IRS investigation, from whom will the money necessary to continue the amenity system come? Is the Developer going to voluntarily return the huge profits (illegitimately made at the expense of the US taxpayer, according to the IRS) made from the sale of the amenity facilities? The last time the Developer defaulted on his amenity obligations, it took a class-action lawsuit to get him to pay up.

The issuer of the bonds, The Center Districts, are paying a lower rate of interest to the bondholders who receive tax free income. Now that interest rates have come down substantially (creeped up last week) The "problem" is lessened and it may be an advantageous time to buy back those bonds with Developer assistance and issue taxable bonds. Maybe a hybrid, Fed Taxable, Fl Tax free would work.?

EdV: Re your comments "From your lips to God's ears". Please tell us who in an official capacity can guarantee that won't happen?. Who in an official capacity can speak to the effect this ruling will have/not respecting residents? Please tell us what officials are working to protect the individual/collective rights of residents? We know what the contracts say but contracts were written to be broken . It was in God's plan so that we would have an over-abundance of lawyers.
With all respect due, I am still amazed that as a non-resident you seem to have more information regarding this subject matter than the average resident bear.

I agree with barefoot this issue won't deter from the building of The Villages. Obviously there are competing voices here and thankful so because this subject needs to be studied carefully and followed to its conclusion. Methinks some are fearful of what affect this will have on their investment. Might i suggest that as any investment a continual watchful and probing eye is necessary even if someone else is managing their funds. Investors need to know how current events are affecting their savings so that if there is a need to pivot..they can pivot like a Magic Johnson without falling on their metphorical faces.

Again I say cooler heads, like Sgt Joe Friday prevail, so all I want are the facts

True, now may be a better time to issue replacement taxable bonds. However, the current bondholders would presumably claim that the lower current interest rates have increased the value of their existing bonds and thus the current bondholders' losses from the Center Districts' breach of the Districts' warranty that the current bonds are tax exempt. Furthermore, who knows what interest rates will be when, and if, it is necessary for the Center Deistricts to issue replacement bonds. In summary, it cannot be predicted how the issuance of replacement bonds, if that becomes necessary, would work out--but it wouldn't be pretty.

As the months move ahead ,we will see if new home sales are declining because of this news. IMHO ,I think it might have some impact on home sales here, but then again I could be wrong. We will see.

Rubicon,

I was merely responding to the other post that suggested that throughout this entire 5 year (or more) ordeal, that the developer has never said word one regarding the potential financial impact on TV residents, when in fact he has.

You will also note that throughout my many posts here on this subject over the years I’ve never professed to claim I know the outcome, only what cannot legally happen based on reading the applicable legal documents.

By the way, one option that I’ve not seen mentioned is that instead of requiring the Center District to recall all the tax free bonds in question and then sell a new set as taxable, is to simply agree to pay a penalty to the IRS each year for the remaining life of the bonds in question.

Pure speculation on my part but certainly appears to be the path of least resistance if the IRS assertions prevail through the legal system.

If what you say is correct- "the bondholders who receive tax free income" how in the world could residents in TV be held responsible for their tax debt?
Even if the were sold as "tax free bonds" wouldn't it be a "buyer beware" situation?

[QUOTE=Advogado;689065]True, now may be a better time to issue replacement taxable bonds. However, the current bondholders would presumably claim that the lower current interest rates have increased the value of their existing bonds and thus the current bondholders' losses from the Center Districts' breach of the Districts' warranty that the current bonds are tax exempt. Furthermore, who knows what interest rates will be when, and if, it is necessary for the Center Deistricts to issue replacement bonds. In summary, it cannot be predicted how the issuance of replacement bonds, if that becomes necessary, would work out--but it wouldn't be pretty.[

It depends on the deal. Since you have no numbers,even you cannot predict the outcome. Pretty is in the eye of the beholder.

It would seem so. Most tax free bonds are sold with a legal opinion. We would have ti see what it said in that document. I would have to assume that full risks were disclosed. I doubt the IRS would go after someone who purchased these bonds for back interest if they were called. IMHO.

Does the legal opinion attached to the tax free bonds disclose all risks? If so, the holders of the bonds could not claim anything. Besides, I imagine after this ruling that the price of the bonds will drop, possibly below par reflecting the uncertainty. In that case the CD would have to pay out less particularly if these bonds are no longer tax free, but taxable.

I looked thru the thread and didn't see this article by Bond Buyer Online posted here, and I think it has some good information:

".......Sanford said the facts in the Village Center CDD are unusual. CDDs typically are initially created by developers, which issue bonds to finance the development of infrastructure in a community, and then sell lots to homeowners. While the developer or related parties may initially control the board of supervisors that governs the CDD, under Florida law once there are 250 residents members of the board must be elected by the “qualified electorate,” meaning residents who can vote.

The Village Center CDD was set up as a non-residential CDD with a board of supervisors controlled by the developer or affiliated parties for about 20 years, according to the IRS. The CDD’s bond documents stated that because of the non-residential nature of the development, there would never be “qualified electors” of board members, the IRS said.

The CDD’s board petitioned four times to shrink or otherwise move the district’s boundaries so that it would not include residences. Sanford said he had never seen a CDD take such actions.

The Village Center CDD contained recreational, water and sewer, and postal facilities as well as fire stations, that were constructed or acquired, owned and operated by the developer. Bonds were issued by the CDD to finance the purchase of these facilities from the developer. In its TAM, the IRS said that in some cases the “amount of [bond] proceeds paid to the developer and its affiliates significantly exceeded the developer’s costs of the assets acquired.”

Lots sold in other nearby CDDs were subject to deed restrictions requiring services to be provided by the developer, including an obligation by the developer to “perpetually provide the recreational facilities.” Property owners were required to pay the developer a monthly “amenities fee,” even if recreational facilities were located outside of their districts.

The IRS said in its TAM: “The issuer [CDD] was organized and operated to perpetuate private control and avoid indefinitely responsibility to a public electorate, either directly or through another elected state or local governmental body. That fact is not consistent with qualification as a political subdivision.”.......

Bond Buyer Online - IRS Ruling Against Fla. CDD May Have Limited Reach

Edv: Thank you this is the sort of thing we need to explore as options. You are other posters have made some excellent suggestions. While we are not in the loop we can at least offer these solutions to the powers to be via the POA. This is all I have ever suggested regarding this issue....that is we have some input since we have some risk.

The issue has a satisfactory solution. It may be that the parties IRS Developer et are so invested that they have become inflexible.. egos getting in the way. The reputation of the IRS the fact that the Developer is a huge Republican contributor are side issues and don't belong in this mix. A deal can be struck that satisifies both and as always leaves both parties feeling they gave something up....that's the nature of compromises

I appreciate your input and I am gald that you are well informed about this issue because we need all the friends that we can muster.

Advogado wrote:
What is your supporting documentation for this statement? The only thing that I recall coming from the IRS with respect to the amount of money that the developer made on this was that he was actually paid LESS than what the amenities were truly worth. Unfortunately for us, the real benefactor of the tax-free status of the bonds was the entity that we the residents pay for with our amenity fees - the central districts. If the bonds were sold as taxable bonds, the interest rates would have been higher and therefore our amenity fees would have been stretched tighter to pay off the bonds.

LESS??? Like paying $84,000,000 for $8,800,000 worth of property?

THE POA BULLETIN

IRS recently ruled that the CDD paid LESS yes LESS tan the proprty was wrth.,

I am afraid that you are mistaken about the IRS ruling, probably because of a misleading article that appeared in the Daily Sun. As confirmed by Janet Tutt at a POA meeting, the assertion that the CDD paid less than market value is NOT an IRS conclusion or ruling. It is merely an argument made by the CDD's attorney, which has not been agreed to by the IRS. I would you suggest that you read the article about the IRS in the following POA Bulletin: http://www.poa4us.org/bulletins_file...etin201304.pdf

To expand on my previous post, not only has the IRS never ruled that the CDD's paid less than the assets were worth, in its recent TAM, the IRS is still complaining about the size of the Developer's profits.

Furthermore, if taxable bonds had been used, the amenity fees would not have been higher. Using the income-stream-valuation methodology employed in the transaction, if taxable bonds had been used, the amenity fees would have stayed the same, but the Developer's profits would have been less.

Orlando sentinel

Bond profits go to developer

Morse, 76, is the developer of The Villages, one of the world's largest retirement communities, located on 33 square-miles south of Ocala. Through his fully owned Holding Company of The Villages, he has built and sold more than 44,400 homes since 1983.

Morse has a fortune of $2.6 billion, at least $955 million of which comes directly from money paid to him from the issuance of tax-free municipal bonds -- including the bonds ruled taxable by the IRS, according to data compiled by Bloomberg from an analysis of 38 bond-offering statements.

Under Florida's community-development district arrangement, Morse built amenities in The Villages -- primarily golf courses, pools and guard houses -- and then sold them to residents through district boards that decided how much to pay for the assets. The boards were appointed by Morse, as state law allows, and in every case the majority of the members worked for Morse; one board included Morse, according to Bloomberg's analysis.

AND

Herald Tribune


In 2008, a sharp IRS agent conducting an audit figured out how the greedy Villages had perverted the law even further, adding a unique twist that kept the district's board of directors from ever being elected by the people who live there. That allowed the family of developer Gary Morse to pocket $925 million from the sale of tax-free bonds alone, according to Bloomberg News.

Morse, whose fortune Bloomberg estimated at $2.9 billion, used some of the proceeds of the bonds to pay for The Villages' expansion, but the biggest chunk of the cash went to purchase from him the right to collect amenity fees and the actual amenities themselves, such as golf courses and swimming pools.

As Agent Dominick Servadio Jr.'s audit got close to the heart of the matter, he began to write letters to the district questioning whether the proceeds from tax-free bonds were being used for a public purpose, whether the purchases were worth what was paid and whether the district was acting in the best interest of the public. Excellent questions, all.

Indeed, why would a board with the interest of the public at heart take out multimillion-dollar loans to buy the developer's responsibility and assets — unless, of course, the real goal was to make him rich? Consider that the developer is required by deeds to provide amenities to Villages homebuyers. Why not just stay out of enormous debt and let the developer collect amenity fees and take care of pools and such?

Suddenly, Servadio ran into trouble. The 25-year IRS bond expert found himself under investigation by agents of the Treasury Department's inspector general who accused him of illegally leaking his colorfully written documents to the press.

They tried — unsuccessfully — to charge him with a crime. The treasury agent who interviewed this columnist in 2011 stared in disbelief when told that the newspaper got all the IRS agent's documents through public-records requests. Obviously, the agent was uninformed about breadth of Florida's open-records law.

At the time, the agent denied that the investigation into Servadio's actions was a result of Morse's political influence. The developer, his family members and employees are among the largest contributors nationally to the Republican Party, its causes and committees. They kicked in at least $11.6 million in the last 13 years, including $2.4 million alone in the 2012 election cycle, according to OpenSecrets.org, an organization that tracks contributions.

Servadio retired to care for his ailing wife, and the case got bounced around to various agents of the IRS in different cities.

Meanwhile, in January 2012, dissatisfaction with community-development districts was brewing across the state, and Gov. Rick Scott ordered an investigation of Florida's 1,634 special districts. (The probe isn't expect to be done until January.)

Two months after Scott signed the executive order, Morse, his three children and The Villages itself donated a total of $180,000 to Let's Get to Work, a political-action committee whose millions in contributions are expected to help Scott get re-elected in 2014.

Then, in the last quarter of 2012, The Villages hired the two-time chairman of the Florida Republican Party to lobby for its CDDs in Washington. Apparently it didn't work.

Fast-forward six months to today and the IRS ruling.

Florida's director of bond finance says the ruling will have an icy effect on districts that want to issue tax-free bonds, which have been used to build much of the infrastructure inside Florida developments.

Good. CDD bonds are a rip-off — just a not-so-subtle way to shift the cost of doing business from developers to the people buying homes. Buyers in average developments with a CDD get to pay for some infrastructure twice: once in the price of the house and again as they pay off bonds.

In The Villages, however, it's more like paying triple: once in the price of the house, once (with interest) as the bonds are paid off and again (with more interest) in a bond attached to individual homes at the closings.

Jimbo - so if this is correct how can we determine exactly what amount of $$$ the IRS is looking to recoup. Also if in fact Mr Morse was the recipient of this money through The Villages Holding Company than I could see how we as residents may end up paying for this through the amenity fees. He has the power to collect from us - an outside bond holder would not. I'm not saying that power is legal, moral, or the right thing to do - just that he can do it.

Well the IRS will negotiate a settlement they always do.

If Morse bounced the responsibility back to us he would see a class action suit more than likely by the home owners.

Where do U see that he can?

.

I believe I read somewhere that about 60% of the amenity fee goes to bond interest. Does anyone know if this is accurate?

Posts 105 thru 108 are the exact reason(s) that furrowed my brow when residents continued giving high praise to the Developer....and repeatedly explained that the residents leveraged this entire project meaning that the Developer really seldom took any business risks.

Five years ago I asked that this issue be studied in behalf of the residents to determine our options. Others wanted a wait and see. Well time is running out. We all know where the fault lies. What we don't know is will the Developer step up?

As to replacement bonds, etc another factor to consider is the effect the Fed's bond buying will have on the future of the bond market?

My brow furrows as well when residents basically stick up for the Developer and his actions in this case when he left us, the residents, holding the bag. Its just hard to believe.

It is, indeed, hard to believe.

While I enjoy life here and credit the Developer for showing absolute genius in many creating many aspects of The Villages, the fact is that Developer runs a very effective local propaganda machine with control of the local paper, TV station, and radio station-- as well as having great influence over the Villages Home Owner Association, local businesses, state and local governments. If any of those entities had been truly independent, there would, years ago, have been a much-more-critical look into how the Developer has financed The Villages through Developer-controlled Community Development Districts and the use of tax-payer subsidies (in the form of purportedly tax-exempt bonds). Instead, until recently, only the POA and to some extent, the Orlando Sentinel, have raised a red flag.

Jimbo - my reference to he "can" is the based on the fact he pretty much holds all the cards - at least at this point.

I too am a little uncertain as to the current status of the valuation audit(s) of the sold amenities. But I think it went like this:

The original agent pretty much valued the properties strictly on their physical asset value plus a modest amount of profit for a like facility. This caused an uproar in the press since the VCCDD paid tens of millions of dollars more to purchase it from the developer.

Last year the IRS attempted to settle the argument by hiring an independent auditor just to determine the true value of the amenity facilities (golf courses) that were sold. She ultimately concluded that it was worth something like 25-30 million when applying 15 years of amenity revenue to the formula. Or in other words about half of what the VCCDD actually paid.

Shortly thereafter the VCCDD attorney(s) issued letters and statements applauding the auditor for finally agreeing them that the amenity revenue should be included. But then they added their own little twist by saying that a “slight” error had been made and that the revenue stream should have been based on 30 years as is allegedly customary when a private utility company sells a water or sewage plant to a municipality, not 15. Then after running the numbers back through at 30 years they came to the conclusion that the VCCDD actually paid slightly less than what they claim is the true value of the property.

But I too have not seen a response to this latest argument from the IRS.

For those of you who insist on speculating who or what entity would be responsible for the back taxes and interest should the final ruling be that the bonds were in fact taxable, here is a link to the IRS Tax Exempt Bond home page.

Under the Voluntary Compliance section it states:

“….the IRS seeks to encourage issuers, conduit borrowers and other parties to bond transactions to exercise due diligence and to attempt to correct any issuance and post-issuance infractions of the applicable sections of the Internal Revenue Code and regulations. This expansion reflects the IRS's continuing policy of taxing bondholders only as a last resort and its desire to resolve tax-advantaged bond infractions with other parties to the bond transactions.”

So not only is taxing the individual bondholders a last resort, can you imagine the outrage you would feel if you received a letter from the IRS claiming you owe them several thousand dollars in back taxes and interest for a taxable bond that was part of a tax free bond fund you purchased in 2006.

"But I too have not seen a response to this latest argument from the IRS."

Appraisal methods are 1) Cost to build 2) Market Value 3) Income Approach. Themost appropriate in tnis case wouldbe the income approach utilizing a discounted cash flow analysis (DCF). It ay appear that the original auditors valuation weighed heavily on tne cost approach? The actual valuation is probably much higher on the income approach, particularly since Interest rates have declined significantly. Under the DCF method, the Net Operating Income( Net Income before Depreciation and Interest NOI) divided by the Capitalization Ratio (Cap Ratio) which isbased on current interest rates. A lower Cap Ratio produces a higher valuation fr the property. My educated guess is that the initial auditorsvaluation was an unsophisticated approach (Cost Badis) and when the more sophisticated apprach (Income Basis or DCF) a more accurate valustion is determined hence the recent determination of value by the CDD which the IRS may have a diffucult time disproving.

In addition, it is a lot simpler for the IRS to deal with one issuer instead of thousands of bond holders. The leverage that the IRS has in dealing with the issuer is that the issuer will be liable to reimburse the bondholders for their losses if the IRS does pursue the bondholders. The basis for that liability is breach of the warranty that the issuer gives the bondholders to the effect that the bond that the issuer is selling to them is exempt from federal taxes. Thus, one way or the other, the cost of the lost tax exemption is generally going to end up on the issuer, with maybe some liability on the part of other parties (attorneys, underwriters, etc.) involved. Again, hard to say, at this point, exactly how all this will play out here. Finally, we need to keep in mind that the fat lady has not yet sung on the basic issue of whether the bonds are, or are not, tax exempt.

This is a link to an old article in the Ocala paper that used that percentage. I have no way of knowing if that is correct or even up to date, but seems like I've heard 50-60% somewhere.
The Villages -- CDD fees, policies reveal developer's clout

The Issuer issued the bonds in good faith, as did any other Florida CDD's, in compliance with existing laws and a legal opinion. I do not know how that legal opinion read but it should have stated the facts, including the fact that the IRS had not passsed final judgement on tax free status. If the bondholder chose to proceed anyway, it should be his loss and not anyone elses, provided all risks were adequately disclosed. I am not taking sides, only trying to understand the facts.

If that is the case we are a pretty darn good efficiently run operation. Al thise amenities fir anout $65-70/month after debt service? How do they do it?

The warranty of tax exemption is standard and is intended to put the cost on the issuer in exactly this kind of situation. That is how the system works. Good faith (if any) on the part of the issuer has nothing to do with it. Otherwise, few people would be willing to purchase municipal bonds. The rationale is that it is incumbent on the issuer to make certain that the bonds qualify as tax exempt and take the hit if they are not.

Maybe the issuer, in turn, has some kind of recourse against its legal advisors or, in this case, against the Developer (who obviously structured the deal). However, in the absence of a municapal bankruptcy, it is hard to conceive of the Center Districts pursuing any kind of remedy against the Developer. Only time will tell about some of this stuff.