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?

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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.