[manaboutown]

This is out of the Sentinal's article.

"Israel said the district is weighing its options on how to proceed with the case, but it's "too soon" to tell. District officials said they have spent more than $700,000 defending their position. Israel said he hasn't calculated how much in back taxes is owed."

...and the clock is still running on the legal fees as well as perhaps any additional interest which it appears are being paid and/or are to be paid by the central district(s) out of what, the amenities fees paid by Villagers?

[Advogado]

Originally Posted by villagerjack

Perhaps, but if the legal opinion attached to the bonds highlighted the risk, and I do not know what it said, then it should be at the risk of the purchaser. In addition, those bondholders who bought years ago and held would probably have little or no loss since interest rates declined substantially. But you are likely correct. This will not be over for quite a while.

As I pointed out before, the District covenanted take whatever steps are necessary to maintain the tax exempt status of the bonds. I loosely referred to to the effect of that covenant as a "tax-exempt warranty", in a previous post, because that is what it amounts to. If the District breaches that covenant by failing to maintain such tax exempt status and the bondholders have to pay taxes, the District would seem to be clearly liable to the bondholders. This is also pointed out, but not expained, in the Orlando Sentinel article of today.

What gives you the idea that the bondholders have "assumed the risk"? Have you now read the official statements for the bonds that I previously referred you to? If not, you may wish to do so, before reasserting your assumption-of-risk or any other theory.

By the way, I would be happy, as a Villager, if you are right and the District could find some way to avoid such liability. If, after you read the bond documents, you come up with a way (e.g., some actual basis for your assumption-of-risk theory), you might want to pass your idea on to the District. If you have such a way already, it is to bad you didn't tell the District a long time ago. You could have saved it hundreds of thousands of dollars in attorney fees.

[gomoho]

Originally Posted by manaboutown

This is out of the Sentinal's article.

"Israel said the district is weighing its options on how to proceed with the case, but it's "too soon" to tell. District officials said they have spent more than $700,000 defending their position. Israel said he hasn't calculated how much in back taxes is owed."

...and the clock is still running on the legal fees as well as perhaps the interest which it appears are being paid and/or are to be paid by the central district(s) out of what, the amenities fees paid by Villagers?

Thank you for highlighting this - if the district didn't think they would be looked to for the back taxes I don't imagine they would have spend $700k plus to fight this.

[mickey100]

Originally Posted by gomoho

Thank you for highlighting this - if the district didn't think they would be looked to for the back taxes I don't imagine they would have spend $700k plus to fight this.

How true.

[Advogado]

Originally Posted by janmcn

Potential impact of IRS decision on The Villages' tax-exempt bonds causing worries - OrlandoSentinel.com



Here's the article from today's Orlando Sentinel.

The article is a reiteration of what I have been saying, and have been attacked for saying, on this site for a long, long time.

[manaboutown]

Another part of the artle in the Sentinel:


"The district sold $426 million in tax-free bonds from November 1993 through June 2004, including $364 million worth of bonds that were under scrutiny in the five-year IRS probe. The district used the borrowed money to purchase boccie-ball courts, golf courses, swimming pools and other recreational facilities from Morse, whose fortune is estimated by Bloomberg News at $2.9 billion."

So, if I understand this correctly, the central districts, controlled by Morse, paid Morse $364,000,000 for these facilities. Who determined the prices to be paid, a disinterested third party appraiser or one controlled by Morse? How were the prices determined? They most assuredly were not based solely on cost to build or current structural value. If an income appraisal approach was used the income would be from amenity fees paid by Villagers. So Villagers pay the amenity fees which are then used to vastly increase the "value" of physical structures based on their "income" from the assessed fees. Then, based upon the fees paid by Villagers the physical lands and structures thereon are sold at very high prices, possibly at multiples of actual cost to build, from Morse to the central districts controlled by Morse which contain no residents, only commercial properties owned by Morse. Wow!

[EdV]

Stop the presses, the end game on this matter may be sooner than we thought.

In the past, I and other posters on this subject have speculated that the Developer/VCCDD might challenge this all the way through the Tax Court(s), or even higher.

But it turns out that the Tax Court path is an option available only to a challenging tax payer. But in this case the VCCDD is not a taxpayer but a Tax-free Muni Bond issuer and it’s next and apparently last recourse at this point is an appeal to the IRS Office of Appeals with a final challenge to the ruling issued in the May 30 letter from the IRS.

A settlement agreement between the VCCDD and the IRS could well be reached in a year or less.

I’ll have more to say on that shortly but wanted to get this info posted.

[TVMayor]

From Bloomburg June 10, 2013

Dirt-Bond Sales Near �07 Peak Belie IRS Tax Ruling: Muni Credit

Demand for $6 billion of bonds sold to finance Florida housing developments shows no signs of waning even after the Internal Revenue Service said debt issued for a project of billionaire H. Gary Morse isn�t tax-exempt.
A Florida land-backed bond sale last week by Verona Walk Community Development District brought issuance of such debt this year to $323 million, close to the highest since 2007, data compiled by Bloomberg show. In May, the IRS alerted Morse that bonds sold to finance a district he created weren�t tax-free, a decision with potential implications for hundreds of similar entities.
Land-backed debt, dubbed dirt bonds, is the riskiest municipal segment, accounting for almost half of default filings where investors didn�t get paid, according to Concord, Massachusetts-based Municipal Market Advisors. Still, buyers are drawn by the extra yield. Wells Capital Management and Nuveen Asset Management plan to keep their bonds from Morse�s project while continuing to buy debt of certain districts.
�There�s a yield premium in the market for this type of debt that makes them competitive,� said John Miller at Nuveen, who oversees $95 billion of local debt in Chicago. �That tends to limit the amount by which the bonds would fall.�
Pace Prevails
Investors are seeking lower-rated local debt for the higher relative yields as the Federal Reserve holds its benchmark overnight rate near zero to spur the economy. Munis one to three levels above junk, encompassing the debt from Morse�s project, have earned 1.5 percent in 2013, compared with a loss of 0.4 percent on top-rated munis, Barclays Plc data show.
The IRS ruling related to $426 million of bonds sold by Village Center Community Development District, a Morse residential project in central Florida.
Perry Israel, the Sacramento-based attorney for the district, said June 7 that its board hasn�t decided whether to appeal the IRS decision.
Morse is the developer of The Villages, one of the world�s largest retirement communities, located on 33 square miles (85 square kilometers) in central Florida. Through his fully owned Holding Company of The Villages, Morse has built and sold more than 44,400 homes since 1983.
Different Beast
Village Center bonds rated three steps above junk and maturing in November 2032 traded last week with an average yield spread of about 2.2 percentage points, the lowest in five weeks, data compiled by Bloomberg show.
The project �is a different type of entity than a number of the other ones that we�ve seen or currently hold,� said Dennis Derby, who helps manage about $34 billion of munis, including $5 million of Village Center bonds, at Wells Capital in Menomonee Falls, Wisconsin.
Verona Walk issued $7 million of revenue bonds to refinance debt sold to build part of a 760-acre development near Naples on the Gulf Coast, bond documents show. Standard & Poor�s rated the deal A, the sixth-highest level. Bonds maturing in May 2035 yielded 4.48 percent, or about 1.4 percentage points above top-rated munis, Bloomberg data show.
The bonds are repaid from assessments on 935 residential units, of which only about 75 are undeveloped, Michael Rosen, Verona Walk�s district manager, said in an interview.
Audit Scenario
�It�s a fairly well-occupied development, and therefore there�s not a lot of risk for the bondholders,� he said.
Borrowing documents warned of a potential review of its tax-exempt debt and Florida dirt bonds in general given the latest IRS ruling.
If the IRS were to audit the Verona Walk bonds and determine that they aren�t tax-exempt, such a decision �may adversely impact any secondary market� for the securities and their price, the documents say.
The IRS determined that the Village Center bonds aren�t tax-exempt because the entity isn�t a political arm of the state, according to an IRS memo dated May 30. Since its creation in 1992, the district has been issuing debt with approval from a board of supervisors controlled by the developer, according to the IRS memo.
The agency said state law intends for the development districts to be turned over to residents who vote in board members at a general election. Yet the developer has owned sufficient land to appoint the board even though the district has existed for over 20 years, according to the memo.
Verona Walk�s documents indicate that four of its five board members are qualified electors, or residents of the district, who were voted in or appointed.
Research Requirement
Derby and Miller said buying Florida dirt bonds will require additional research into whether board members were elected by residents or handpicked by the developer.
�The results of this case, both what�s happened in the past and how it unfolds in the future, is going to add to our research criteria and our research process,� said Miller, whose firm holds $10 million of Village Center bonds.
An improving Florida housing market helps make the development bonds attractive, Miller said.
The April median sale price for a single-family Florida home was $165,000, the highest since at least January 2009, according to Florida Realtors, a profession trade association.
�Characteristics are improving generally in this market,� Miller said. �The reliability of repayment is going up.�
In the municipal market this week, New York City Transitional Finance Authority leads issuers offering debt with yields close to the highest since March 2012.
At 2.19 percent, yields on benchmark 10-year munis have exceeded the interest rate on similar-maturity Treasuries for seven straight trading days, the longest stretch in more than a month.
The ratio of the yields, a gauge of relative value, is about 101 percent. The higher the percentage, the cheaper munis are compared with Treasuries.
To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Michael C. Bender in Tallahassee at mbender10@bloomberg.net
To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

[rubicon]

Originally Posted by EdV

Stop the presses, the end game on this matter may be sooner than we thought.

In the past, I and other posters on this subject have speculated that the Developer/VCCDD might challenge this all the way through the Tax Court(s), or even higher.

But it turns out that the Tax Court path is an option available only to a challenging tax payer. But in this case the VCCDD is not a taxpayer but a Tax-free Muni Bond issuer and it�s next and apparently last recourse at this point is an appeal to the IRS Office of Appeals with a final challenge to the ruling issued in the May 30 letter from the IRS.

A settlement agreement between the VCCDD and the IRS could well be reached in a year or less.

I�ll have more to say on that shortly but wanted to get this info posted.

EdV thank you for the information and reminding us to stay focused on the issues that matter now. As long as we are following this action plans can be made as facts evolve

[villagerjack]

Originally Posted by manaboutown

Another part of the artle in the Sentinel:


"The district sold $426 million in tax-free bonds from November 1993 through June 2004, including $364 million worth of bonds that were under scrutiny in the five-year IRS probe. The district used the borrowed money to purchase boccie-ball courts, golf courses, swimming pools and other recreational facilities from Morse, whose fortune is estimated by Bloomberg News at $2.9 billion."

So, if I understand this correctly, the central districts, controlled by Morse, paid Morse $364,000,000 for these facilities. Who determined the prices to be paid, a disinterested third party appraiser or one controlled by Morse? How were the prices determined? They most assuredly were not based solely on cost to build or current structural value. If an income appraisal approach was used the income would be from amenity fees paid by Villagers. So Villagers pay the amenity fees which are then used to vastly increase the "value" of physical structures based on their "income" from the assessed fees. Then, based upon the fees paid by Villagers the physical lands and structures thereon are sold at very high prices, possibly at multiples of actual cost to build, from Morse to the central districts controlled by Morse which contain no residents, only commercial properties owned by Morse. Wow!

Unless we see the actual appraisal it would just be a guess. Usually there is not that much difference between the income approach and the other two appraisal methods so to say he "vastly increased the value" is speculation. The value from the income approach is not determined from the assessed fees but the net operating income before interest and depreciation but after all the expenses of the VCCDD. An appropriate Cap Rate is then applied based on current interest rates. In fact. the latest reading on this valuation a few weeks ago was that he received less not more but it is not clear what method was used in that calculation either.

[mickey100]

Originally Posted by Advogado

The article is a reiteration of what I have been saying, and have been attacked for saying, on this site for a long, long time.

There is a minority that attacks anyone or anything that verbalizes a problem with the Villages or with the developer. I suspect most people are grateful for the posts you've made and information you've provided. I know I am.

[gomoho]

If I am not mistaken the question about the value of the assests by the IRS has been resolved in favor of the developer - that he actually was paid less than they were worth at the time. I'm sure you'll correct me if I am wrong.

[manaboutown]

Originally Posted by villagerjack

Unless we see the actual appraisal it would just be a guess. Usually there is not that much difference between the income approach and the other two appraisal methods so to say he "vastly increased the value" is speculation. The value from the income approach is not determined from the assessed fees but the net operating income before interest and depreciation but after all the expenses of the VCCDD. An appropriate Cap Rate is then applied based on current interest rates. In fact. the latest reading on this valuation a few weeks ago was that he received less not more but it is not clear what method was used in that calculation either.

From the Orlando Sentinel, April 29, 2009:

The district grossly overpaid Morse by $53 million, according to the IRS. The tangible assets, such as pools, golf courses, mail facilities, golf-ball washers and guardhouses, were worth about $6.9 million. Appraisers the Village district chose weren't qualified under IRS rules, partly because they weren't independent, and they failed to calculate correctly the value of the items purchased, Servadio contended.

The district acknowledged that one of the appraisers "acted as a consultant to both parties in the transaction," but Israel argued that a regulation requiring independent appraisers doesn't apply to a tax-free bond transaction. Even if it did, he wrote, the appraiser was acting as an independent contractor and was "not subject to the District's controls in the same fashion that an employee might be."

"In other words, it's all good to hire your buddies help you spend $64 million in public funds. This is Florida, where the rules are different. Go back to your office in the beltway, Revenooer Man.

Documents 'recreated'

And then there's the allegation of overpayment. The district went on a $53 million shopping spree in The Villages for recreational goodies but apparently misplaced its sales slip.

Neither of its supposedly very qualified appraisers could provide a schedule of what each of the tangible properties was worth as opposed to the value of the other portion of the purchase, buying the rights to collect amenity fees.

So, the district stated in a footnote in teeny-tiny type that it asked the two appraisers to "recreate their calculations."

How very entertaining! Where would Richard Nixon be if Rose Mary Woods had "recreated" the 18-minute gap in the tapes of the Watergate scandal?

Of course, the resurrected calculations show that the district paid just the right amount and that it used all the proper methods of figuring it out the value of the amenity-fee rights. "

Adding $53,000,000 onto $6,900,000 of property seems a vast increase to me, and probably to most folks.

[EdV]

The amount that the developer was paid for the amenities he sold to the VCCDD is irrelevant at this point regarding this IRS matter. The Sentinel and other rags love to bring this up to stir the pot.

It was only used by the original IRS agent as one of many examples he used to show that the VCCDD did not qualify to be issuing tax-free Muni bonds. It will have no relevance on what the final assessment of what is owed the government for back taxes.

[Geewiz]

Remember - this is Gary's structure. I assume when everything is done and if money is owed - he will pay. But, if not, everyone bury him in law suits. You can Litigate anyone for anything and win or lose the cost to Tv in reputation and the literal cost to handle each suit will be substantial. I assume he will figure all of this in and pay anything he owes. He's a smart gUy.