IRS issues
 

:BigApplause:
This has been boggling my mind.
I am curious. When the bonds were sold, were they for amenities for at the time current units or all future units being built?

I am not going to touch ensuing questions.

It is my understanding the bonds were sold to pay for amenities that had been built and paid for by the developer, were in current use, and were sold to investors to raise money to buy the amenities from the developer. I think the developer uses his own money to build and pay for amenities and then once the areas are built out, he sells them to the district... something like that. Hope that helps. If I am wrong, someone please correct me.

Indeed Jim. In fact, the IRS agent used this argument as one of the tests for concluding that the bonds in question were not qualified for tax free status.

Well once again we have some new TOTV members trying to understand the facts of this ‘IRS investigation’ and raising a lot of uncertainties. So I thought a little refresher course is in order, so here goes:

What is the likely resolution to all of this? It won’t be to penalize the bond buyers. That would be way, way, way too complicated. You’d be talking about thousands of bond holders and municipal bond mutual funds and reassessing past tax filings over many years. There’s a much simpler resolution. In fact, it’s the one already proposed by the initial IRS agent.

In a letter dated May 18 2009, IRS agent Dominick Servadio told the Village Center CCD it could settle the audit by redeeming $355.35 million of bonds it issued from 1993 to 1995, paying the federal government at least $2.85 million, and agreeing to refrain from issuing any more tax-exempt bonds. The bonds are ‘callable’ so they can be bought back at any time by the issuer without recourse from the bondholders, but the VCCDD rejected the offer.

The whole IRS investigation is likely to end up in Federal Tax Court for a final ruling. But if the IRS were to prevail and a settlement similar to Servadio’s proposal were issued, who would be financially responsible? It certainly won’t be TV homeowners or the numbered CDD’s that the homes are a part of. It would be the two special CDDs that all of the amenities (exec golf courses, sports courts, pools, and Rec centers) are organized under. And who is the majority land owner of the property in those two CDDs? Why none other than Gary Morse the developer and/or his myriad holding companies. And we know he’s the majority landowner in those two CDDs because he and he alone appoints their board members every year. Now consider this:

When you purchase a home in TV, it is placed under one of the ten numbered CDDs. Each of these CDDs have taxing power over the properties within them, but not against any property outside that CDD. And each year you pay a property tax to your CDD to cover the cost of maintenance of the common grounds. It’s called a ‘Development District Assessment’ and can be roughly $1000-$2000 per year. So that pays for all those beautiful flowers at your village entrance that are replaced 4 times a year, among other things.

Similarly, the two special CDDs have taxing power over the owners of property within them but not property outside of them. Their sole relationship with TV homeowners is a contractual agreement to provide ongoing maintenance of the amenities within them in exchange for a guaranteed monthly amenity fee. And by contractual agreement with you, that fee can never be raised by more than the rise in the Consumer Price Index within a given year. So there’s no capability for the two special CDDs to pass on any substantial settlement obligations to TV homeowners. They already customarily raise the amenity fee by the CPI increase anyway.

And they’re not going to try to siphon off amenity funds by drastically cutting back on maintenance of the amenities. Remember that a few years ago they got a little too cavalier about dealing with mold issues in some Rec centers as well as trying to pass off maintenance of the multimodal paths onto the numbered CDDs that had these paths. The Villages Property Owners Association (POA) sued them and got an out of court settlement of 40 million dollars to be pumped back into the special CDD over the next nine years. The first major benefit of this was the funding of widening of the paths that was just completed.

So while I can’t predict exactly what will happen with this, I can say with certainty and facts what cannot happen and that it will have little if any impact on TV homeowners unless of course they allow some of the fear uncertainty and doubt (FUD) being tossed about, to get to them.

The financial impact of this rests solely with the developer and/or the companies he controls that own the majority of the property within the two CDDs that are being audited by the IRS. And let’s face it, he can afford it.

Bravo Ed. Thanks for the refresher. You're a fountain of knowledge once again.

IRS issues
 

Very clever way of the developer to get very inexpensive financing!

Edvin and JimJoe thanks for your posts!

Excellent article Ed,

Very well written........

Even fumar can understand this......:thumbup:

Ed, if you've got Fubar.....uh, I mean Fumar.....(sorry).....on board, then you've knocked it out of the park! :1rotfl: :icon_wink:

Seriously, very well written assessment - great job! Thanks -

Bill :wave:

Thank you so much for pulling together the facts and stating this so coherently.

I think your post warrants starting a whole new thread with it, to bring it to the forefront. There is too much conjecture and "the sky is falling" in this thread for newbies and wannabees to make any sense of it in deciding whether to buy here in TV.

I hope you are right but where is the money coming from to pay for the costs of the defense and attorney fees right now? Does it come from the developer's pocket, the pocket of the home owners in the commercial districts, or from the account that is funded by the amenity fees? I am concerned it is the latter but not sure, and if it is, why would you think paying the IRS claim would be any different if the costs of the defense are being paid by amenity fees?
Can anyone tell us who is paying the defense costs and attorney fees so far in this case? If it comes from the amenity fees, that would be a bad sign. If it is coming from somewhere else, that would be FANTASTIC and everyone should know that.
Thanks for answering this. JJ

They will be paid for out of the budget for legal fees (approximately $250,000 this year) for the two special CDDs. The IRS is challenging the bonds issued by those two CDD’s not you or your numbered CDD so it’s appropriate.

You need to change your thinking about the amenity fee and the two special CDDs. You are obligated to pay that fee and expect a reasonable level of service to maintain the amenities at an acceptable level as they were when they were built. But you have no say in how the money is spent. Your contract clearly states this.

As I stated before, if a multi-million dollar judgment is eventually leveled against those two CDDs, then it will be up to the majority owners of the property in those two CDDs to rectify it without impacting the level of service they are contractually obligated to provide to you.

Comment on EdVin's summary
 

The IRS investigation is complicated enough so as to make a brief summary difficult. The above is a good one of the basic facts, including the relationship of the facts in the IRS investigation to those underlying the class-action lawsuit settled by the Developer. However, I would like to make an important addition to the summary, clarify a point about the "Developer", and raise three questions about the conclusions in the last two paragraphs.

First, the addition: It is important to understand that, after the VCCDD rejected the IRS settlement offer, the IRS further expanded its audit (in July 2009) to include all recreational and utility revenue bonds issued by VCCDD, as well as similar bonds issued by Sumter Landing CDD. (The IRS has not included the numbered Districts.)

Second, a clarification about the Develper. I completely agree that the ultimate responsibility rests with the Developer. But having responsibilty is not the same as paying. In the event that the IRS prevails and imposes significant costs on the VCCDD, collecting from the Developer may not be so easy.

In Villagese, we refer to the developer as "he", but the Developer is not a "he". Technically, the Developer is an "it"-- a corporation: The Villages of Lake Sumter, Inc. That corporation is one of a large number of corporations owned by the Morse family, directly or indirectly. I have no idea as to the present net worth of that corporation or what it will be at the time of of a hypothetical IRS victory. In any event, one would think that there might just be resistance to any attempt to "pierce the corporate veil" in order to reach a large enough pool of assets to make the VCCDD whole and to continue the amenity system.

Three questions of EdVin, and they are honest ones:
1. Are you confident that the IRS will not expand its investigation still further?
2. Do you have any information about the present net worth of The Villages of Lake Sumter, Inc. (I don't think the financial statements are public.)?
3. Who do you think will take the necessary legal action to actually collect from the Developer in the event that an IRS "victory" results in the VCCDD not having adequate cash to continue the amenities system? I note that the Developer is sticking the VCCDD with the responsibility for paying the legal fees involved in defense of the IRS investigation and has not issued a word of assurance to Villagers about the possible impact on them of the investigation.

BTW, I have never commented on, and do not intend to do so for the time being, the merits of the IRS case. I also am not saying Doomsday is upon us. My view is that the IRS investigation is a matter with potentially serious consequences for us and that it behooves us to try to understand it, to follow developments, and to be prepared to act IF necessary.

I certainly do not consider myself a Villages "basher", as has been alleged. I have never said anything derogatory about The Villages. In fact, I like it here-- but I don't like to close my eyes to reality.

Where does the money come from for the legal fee budget? Is that budget funded by amenity fees?.. that is my question... Can you answer that please?.

POA News alert
 

Fort those of you not on the POA e-mail list, this just arrived:

***** POA NEWS Alert *****
AUGUST 4, 2011 --- IRS UPDATE ---
On July 27, 2011, the VCCDD (Village Center Community Development District) received the Report of Alice Price, State Certified General Real Estate Appraiser, State of Florida, which was solicited by the IRS, to address the 2nd issue presented by the original IRS investigator, which is as Follows:
“The Opinions of Value (Fishkind and PRMG appraisals) do not support the price paid by the District to the Developer - facilities were purchased from a related party, the Developer, who has controlling ownership of the property within the District and thereby maintains control of the governing board of the District… The proceeds of the Bonds exceeded the amount necessary for the governmental purpose of the issue by more than 5% of such amount. This is considered an ’over issuance’ and therefore interest is not excludable… The payment of the $59+M sales price to the Developer by the District is the payment of gross proceeds of the Bonds to a related party and therefore not a governmental use of those Proceeds… Using tax-exempt bond proceeds to provide private golf courses not available for use to the general public on the same basis as the residents of a private gated community is not an essential government function. Therefore, these Bonds are taxable bonds…” Ms. Price's conclusions were as follows:
“Based upon my review of the Public Resources Management Group (PRMG), Inc. report, I have concluded that the estimate of the value of the amenity stream of $60,500,000 is overestimated and not credible. It should be noted that for analytical purposes and using data contained in the appraisal report under review as well as data provided by the VCCDD, I developed an opinion of the value of the Subject Purchased Assets. Based upon my analysis as outlined within the attached Appraisal Review Report was as follows:
Real Estate and Personal Property $3,990,000
Amenity Fees Income Stream $24,000,000
Total Market Value of Purchased Assets $27,900,000 ”

Excerpts from Ms. Tutt’s email to the VCDD Supervisors on July 27, 2011, regarding this finding by the IRS are as follows:
“…Importantly, the Appraisal Review does correct the essential error that was made by the initial IRS agent handling the audit, by not excluding the value of the amenities fees from the value of the assets purchased with the proceeds of the bonds. However, I believe the value arrived at in the Appraisal Review is substantially less than the actual value of the purchased assets…” “…it has been my experience that while bond issues may vary in length, municipal bonds issued for infrastructure and other governmental operations such as water and sewer systems (which is the model the District used) have used a 30 year income stream when determining value based upon the capitalization of revenue method. I believe that Ms. Price’s use of a 15 year period is based on the assumption that is the typical holding period for a business or property, which is not an assumption that is applicable to this purchase by the District…” (Mr. Ori from PRMG, had advised Ms. Tutt that the 30-year holding period was appropriate because the time frame for such period was equal to or less than the useful life of the capital facilities acquired and the revenue stream being generated supported the acquisition. Additionally he said that he also recognized the 30 year holding period has been a typical holding period for state and local goverments." “The second item of concern is the Amenity Fee Cash Flow Analysis prepared by Ms. Price . . . Initial review of the figures indicates that some of the analysis and assumptions are not accurate which lead her to assert an incorrect value of the net amenity fee cash flow after taking into account the expenses allocable to the amenity fees purchased…”
“Finally, it appears an arbitrary decision was made to change the capitalization rate assumption used to determine the present value of the cash flow…” Ms. Tutt concluded the report to the VCCD by stating that, “…staff will be reviewing the valuation, addressing the issues with the District’s attorneys, and preparing questions and comments for the IRS regarding Ms. Price’s Appraisal Review.”

The POA'S Position in this Matter.
The POA has not taken a position on the relative merits of the positions of the IRS and the VCCDD in this controversy, although we sincerely hope that the VCCDD is able to prevail. In regard to the current IRS investigation, the POA's primary objective is to try to protect the rights and interests of the residents of the Villages, who have made The Villages their retirement home.

Most Villagers are not wealthy and have worked hard in order to now enjoy an active life style in The Villages. Any action that takes away what Villagers have worked so hard to gain is an action that the POA opposes. In this regard, we continue to follow closely the developments in order to try to ensure that any resolution of the IRS investigation does not jeopardize the residents' amenities or result in the costs of an IRS victory being passed on to the residents.
P. S.’s
1) If you are new to the area or want a ‘refresher course’ about the issues we would suggest you review the article entitled “How the IRS Bond Inquiry Affects You” which can be found on our website, poa4us.org. Click on the archived Bulletin link and go to the August 2009, issue.
2) Both Janet Tutt’s memo to the VCDD Supervisors and Ms. Price’s Report are on the District web site. (districtgov.org - left hand column of home page – click on IRS Updates)

Thanks
 

Very nice job of putting it all together after a previous Zillion Posts