[rshoffer]

Originally Posted by katezbox

Please forgive my not "quoting" here - but there seems to be a lot of confusion on what a bond is and isn't and who gets taxed in relation to them - leading to some confusion and even a touch of panic.

Issuance of bonds is one way a business can raise capital. Investors buy bonds (each is usually priced at $1000) with a given interest rate. The issuer pays the interest rate to the bond holder over a time period (usually 10 - 30 years). To the bondholder, this interest is income that can be spent or invested.

Some bond interest is taxable; some interest is not. What makes a bond tax exempt is usually that it is being issued by a municipality or by an organization that is acting in a way that directly benefits the American people. For example, a water utility can issue tax exempt bonds to expand water service - even if that utility is a for-profit organization. This allows sellers of bonds that meet that criteria to raise money at a lower cost than a public company.

Why would someone buy a bond with a lower rate? That's where the tax-exempt portion comes in. If as a taxpayer you are paying 20% in income taxes, you might be better off with a 4% tax-exempt bond than a taxable bond at 4.9% (where after taxes you would only earn 3.92%). Also, tax exempt bonds are frequently viewed as having lower risk since so many are issued by government entities.

It is not the developer or Villagers who would pay tax if these amenity bonds are found to not be tax-exempt. It is the holders of those bonds. Where our risk as Villagers is if the sale of these bonds was deemed to be fraudulent and the bonds recalled.

I have participated in the issuance of bonds and can tell you that developers can't simply "decide" that they will be tax exempt. The IRS usually must issue a determination of their opinion.

In this case, the developer financed the building of amenities within the Villages with these bonds. He also made a profit selling those amenities to the CDD. I do ROI analysis for a living. This is NOT Bernie Madoff. Developers would never develop if there was no profit in it.

Steve from NY - you are right on. I'll see ya' at the Square in April. I will monitor this situation as an investor in my Villages home - but like Russ_Boston and Muncie also state - one article is not getting the full picture.

With apologies for my soapbox (and finance class)

Kate

Clear, understandable and informative. If the bonds were recalled... what happens then? Thank you.

[katezbox]

Originally Posted by rshoffer

Clear, understandable and informative. If the bonds were recalled... what happens then? Thank you.

Here is where the speculation kicks in...

The CDD would need to sell new bonds to replace those being called. The interest rate would presumably be higher (no longer tax free, most likely considered riskier) which would cost us more money in the form of higher amenities fees. Whether or not the CDD would have any recourse against the developer remains to be seen.

This is a complex bond issue that may take a significant time to resolve.

Kate's explanation is right on point. The outstanding question is what happens if the tax exemption is revoked by the IRS? The bond holders will loose the tax exemption and the bond offering documents most likely have provisions setting out what happens to the interest rate, if the tax exemption is revoked. If the interest rate adjusts to compensate the bond holders for a lost tax exemption, there will be a higher cost to someone to fund the cost of the higher interest rates. While it could be possible that the residents would bear some or all of the cost if the district erred, I suspect the developer who benefited from the ability to sell tax exempt bonds will have some of the liability. Also, if the IRS initially approved the tax exempt status, it would have been based on information submitted by the developer and the district. I would think that, in order for the IRS to revoke the status, it would have to contend that the informaiton used to approve it initially was in error. Since that information would have been provided, at least in part by the developer, I suspect the developer would be in line to bear a significant part of any resulting increased cost.

[batman911]

I do not believe loss of tax free bond designation is the main issue. The large (near $50M) profit the CDD paid the developer is of more concern to me. Who does the CDD represent? Is there a copy of the charter on line? The CDD should take bids for building amenities and issue the bonds through a broker (or contract it out). That would be $50M that could be spent (or saved) for maintenance and development of additional amenities.

[downeaster]

Originally Posted by katezbox

With apologies for my soapbox (and finance class)

Kate

No apologies necessary, Kate, and it certainly was not in the "soapbox" league. Major league would better describe it.

And, by all means, keep the posts coming.

[katezbox]

Originally Posted by SNOK

The outstanding question is what happens if the tax exemption is revoked by the IRS? The bond holders will loose the tax exemption and the bond offering documents most likely have provisions setting out what happens to the interest rate, if the tax exemption is revoked. If the interest rate adjusts to compensate the bond holders for a lost tax exemption, there will be a higher cost to someone to fund the cost of the higher interest rates. While it could be possible that the residents would bear some or all of the cost if the district erred, I suspect the developer who benefited from the ability to sell tax exempt bonds will have some of the liability. Also, if the IRS initially approved the tax exempt status, it would have been based on information submitted by the developer and the district. I would think that, in order for the IRS to revoke the status, it would have to contend that the informaiton used to approve it initially was in error. Since that information would have been provided, at least in part by the developer, I suspect the developer would be in line to bear a significant part of any resulting increased cost.

Well said!

[katezbox]

Originally Posted by batman911

I do not believe loss of tax free bond designation is the main issue. The large (near $50M) profit the CDD paid the developer is of more concern to me. Who does the CDD represent? Is there a copy of the charter on line? The CDD should take bids for building amenities and issue the bonds through a broker (or contract it out). That would be $50M that could be spent (or saved) for maintenance and development of additional amenities.

Hi Batman,

I hear you - but the $50M is not pure profit to the developer. It is an amount to represent the net present value of the earnings stream that the facilities would generate. If you were to sell a business, you would not sell it based on assets less liabilities. The increased amount that you would want would include the hard work you have put into the business that will generate future earnings.

k

[JimJoe]

Originally Posted by katezbox

Hi Batman,

I hear you - but the $50M is not pure profit to the developer. It is an amount to represent the net present value of the earnings stream that the facilities would generate. If you were to sell a business, you would not sell it based on assets less liabilities. The increased amount that you would want would include the hard work you have put into the business that will generate future earnings.

k

What is the difference between "pure" profit and profit?
Did the IRS preliminary ruling think it was a fair price?
What revenue stream do facilities in the villages generate?

[katezbox]

Originally Posted by JimJoe

What is the difference between "pure" profit and profit?
Did the IRS preliminary ruling think it was a fair price?
What revenue stream do facilities in the villages generate?

Hi JimJoe,

By "pure" profit I meant profit from just the construction and sale of a facility and it's appreciation. I maybe did not use the best of terms. (Too sad at having left TV yesterday and having to go back to work ).

A facility like the Savannah Center will generate money that Villagers pay to attend events there. If the developer retained that property he would earn the profits from the revenues (less expenses) that it generates. By selling it, he knows it has a value beyond the brick and mortar in the profit stream it will bring.

[iaudit]

Originally Posted by katezbox

Hi Batman,

I hear you - but the $50M is not pure profit to the developer. It is an amount to represent the net present value of the earnings stream that the facilities would generate. If you were to sell a business, you would not sell it based on assets less liabilities. The increased amount that you would want would include the hard work you have put into the business that will generate future earnings.

k

Kate

The trouble is, the developer is not selling a business. He is selling assets that represents amenities that the residents are entitled to use. There is no arms length transaction here between a willing buyer and a willing seller. In fact, who else would be willing to buy the recreational facilities besides the central district.

In addition, if you read the IRS report, they did not take into account the effect of the bond payments on the future earnings stream. I believe the report also indicates that he was double counting the future earnings streams because he was using the same amenity fees from previous assets sales to determine the cash flow for the current sale.

[JimJoe]

Originally Posted by katezbox

Hi JimJoe,

By "pure" profit I meant profit from just the construction and sale of a facility and it's appreciation. I maybe did not use the best of terms. (Too sad at having left TV yesterday and having to go back to work ).

A facility like the Savannah Center will generate money that Villagers pay to attend events there. If the developer retained that property he would earn the profits from the revenues (less expenses) that it generates. By selling it, he knows it has a value beyond the brick and mortar in the profit stream it will bring.

Kate, I don't understand. . You chose the Savannah Center to discuss future revenue earnings.. Do you really think it is that profitable? Even if true.. explain what the revenue earnings are for golf courses, pools, tennis courts, softball courts, etc that can only be used by residents and their guests, renters, and lifestyle previewers, at no cost beyond the amenities fee. Was a "profit" including future earnings made on those too? Isn't the main problem the IRS has that this "profit" is being for a non public purpose and therefore should not be tax free? Wasn't the increased value to the surrounding land the "profit"? Do you count the amenities fee as future revenue earnings? I don't think villagers think those fees were intended to be for profit nor do they think that they were marketed that way. If the district bought the land and paid for "future earnings profits", who is getting those profits now after it was purchased? And where is that money going? How can a seller claim the price of property upon which a village amenity was built reflects their hard work that would generate future earnings when at the time they were built the amenity apparently could never have any future earnings because only the villagers and the invited would use them forever at no cost beyond the cost of maintaining them with the amenities fee? I thought the golf courses, pools, tennis courts etc will be here for the villagers as long as the amenity fees are paid and they will not be sold and run for profit in the future? Doesn't the advertisement say "play golf free the rest of your life"? If I am right , there would be no future earnings. The amenities fee should only reflect the cost of acquisition and maintenance. If I am wrong, I am more confused than ever.

On your first post you talked about the cost to villagers if the IRS preliminary ruling stands. You did not address the question who pays the cost if bond holders are charged interest and penalties by the IRS for the years the bonds are denied tax exempt status. Those bonds go back several years. Who pays that and how much can interest and penalties be on those bonds if they are denied tax free status? If they did get IRS approval why are they reviewing it now?
I appreciate your expertise and hope you can clear those up for me. Thanks.

[STEVEN THOMPSON]

It is important to read ,Laurens complete article, click on the
link she has provided,it may effect current and all future residents
as myselph.
I have been looking into these bonds as an investment an have found
the bond in question--VILLAGE CTR CMTY DIST FLA RECREATION REV BDS.
NOW TRDING AT AN UNUSUAL DISCOUNT AT $80.455 YEILD TO MATURITY
6.65 %.(AT TD WATERHOUSE )--cusip # 92706ncq4
I was wondering why such a discount,now i think i know..

Please read her entire article, sounds like future development and future
fees and house prices could be effected.
I will not try to explain it, for she has done a excellent job in doing that.
I have visited the villages 4 X and think it is a great place and will try to
sell my house in South Florida to move their so this article is very important
to me as well as you, all depends on the IRS ruling.

Please read her complete article before responding. Steve

[Russ_Boston]

STEVEN - Does your move really depend on that ruling? I wonder, even if the ruling went against the developer, what the $ impact PER HOUSEHOLD in TV would be? Has anyone made a guess at what this might be?

With almost 50K households in TV at buildout even a very large number in back taxes tacked on would not be that much - would it? Especially if it is paid back over x number of years. I'm not trying to dismiss the rightness or wrongness of the issues but rather what is the $ impact on me if i buy a home in TV and worse comes to worse.

Just wondering if anyone has done the math.

(I apologize if the math is already in this thread but it's long!)

[chelsea24]

Just a comment, not getting into this debate.

When we first bought here, my husband questioned the bond and all other costs very carefully. He's very sharp with money. Did he like it? No! He was not thrilled with what he saw and although we paid amenities in Illinois, he was really taken back by the bond, plus amenities fee.

However, I challenge Ms. Ritchie to show me any retirement community with anywhere near what The Villages has to offer. She won't find one. We looked, not only at the cost, but obviously, what we were getting for our money.

You can have steak or you can have hamburger. We chose steak. We do not feel we were taken on our house in any way, shape or form. We love it here and it is well worth the price of our home and the amenities and all of the beautiful surroundings.

Long story short -- we think living in The Villages is worth every penny!

[katezbox]

Originally Posted by JimJoe

Kate, I don't understand. . You chose the Savannah Center to discuss future revenue earnings.. Do you really think it is that profitable? Even if true.. explain what the revenue earnings are for golf courses, pools, tennis courts, softball courts, etc that can only be used by residents and their guests, renters, and lifestyle previewers, at no cost beyond the amenities fee. Was a "profit" including future earnings made on those too? Isn't the main problem the IRS has that this "profit" is being for a non public purpose and therefore should not be tax free? Wasn't the increased value to the surrounding land the "profit"? Do you count the amenities fee as future revenue earnings? I don't think villagers think those fees were intended to be for profit nor do they think that they were marketed that way. If the district bought the land and paid for "future earnings profits", who is getting those profits now after it was purchased? And where is that money going? How can a seller claim the price of property upon which a village amenity was built reflects their hard work that would generate future earnings when at the time they were built the amenity apparently could never have any future earnings because only the villagers and the invited would use them forever at no cost beyond the cost of maintaining them with the amenities fee? I thought the golf courses, pools, tennis courts etc will be here for the villagers as long as the amenity fees are paid and they will not be sold and run for profit in the future? Doesn't the advertisement say "play golf free the rest of your life"? If I am right , there would be no future earnings. The amenities fee should only reflect the cost of acquisition and maintenance. If I am wrong, I am more confused than ever.

On your first post you talked about the cost to villagers if the IRS preliminary ruling stands. You did not address the question who pays the cost if bond holders are charged interest and penalties by the IRS for the years the bonds are denied tax exempt status. Those bonds go back several years. Who pays that and how much can interest and penalties be on those bonds if they are denied tax free status? If they did get IRS approval why are they reviewing it now?
I appreciate your expertise and hope you can clear those up for me. Thanks.

Hi,

You have a lots of really good questions that I can't answer - but hopefully which we will get answers to as this develops. There are a lot of parts of this transaction that could impact the status of the bonds, how they affect the bondholders, the developer, the CDD and us as Villagers.

I don't know if the transactions were "arms length," if any original IRS
determinations will be overturned, how the value of income from all these properties should be valued (put 10 accountants in a room and get 10 answers), was it double counted, etc etc.

My remarks were just to clear up some comments that seemed to not understand what a bond represented and others that villified the developer for making a profit. Ms. Ritchie writes an article we should all read - but which we need to interpret along with all of our knowledge and not take as fact. We should not shoot the messenger, but we should question her motives and those of her IRS source. Like Chelsea, I believe "what we get" for what we pay in TV is worth it.

Right now I think we can all learn as much as we can or put our head in the sands or start playing the blame game. I think your questions and those of a few previous posters agree that #1 is our best choice.