Peeling back layers in Villages bond dispute
April 29, 2009
Sunday's column summarized the responses of The Villages government to the Internal Revenue Service, which has been investigating the community's tax-exempt bonds for the last year and has ruled preliminarily that they should be taxed.
In general, the Village Center Community Development District, which sold $64 million worth of recreational revenue bonds in 2003 to buy golf courses, swimming pools and the like, contends that the bonds shouldn't be taxed because it meets all of Florida's guidelines.
The IRS, however, has a different view.
If the early ruling by the agent were to stand, the district could face staggering financial exposure — it has about $700 million in bonds outstanding. Some $214 million of those are recreational revenue bonds and are of the type being audited by the IRS. They are repaid through amenities fees paid monthly by residents.
Let's look at the specific disagreements.
Not 'political subdivision'
The IRS contends that the Village Center district is not qualified to issue tax-exempt bonds because it doesn't meet the agency's test of what constitutes a genuine "political subdivision," such as a city or county. Agent Dominick Servadio Jr. spent 47 pages of his 102-page ruling building the case. To qualify, the district must have substantial sovereign powers, and the Village district doesn't, he contended, because:
•It must be able to levy property taxes. While CDDs in general have that power, this one doesn't because its structure ensures it never will have "qualified electors" to legitimately choose supervisors to make such a decision.
•Its power to seize private land for a public purpose, called eminent domain, is "limited" and "insubstantial," Servadio concluded, not "rising to the level of a political subdivision."
•It does not have the legal right to exercise police power because the Florida law under which the district was created specifically forbids it.
The Villages side
Both Village Center district lawyer Archie Lowry of Mount Dora and Perry Israel, the district's California tax lawyer, said the district is abiding by Florida law in how it chooses a board of supervisors when residents don't live in the district, and it has the right to be considered a political subdivision. The fact that the supervisors all are either employees of the developer or tied to him in some way is not relevant, they contended.
Israel wrote that the district's ability to exercise eminent domain is clear: "The power is substantial within its geographic jurisdiction even if one thought the District was an alter ego of the Developer ..."
It doesn't matter that the district has not yet used that authority. It could, and other districts have done so, he wrote.
Those are strong arguments.
On the test of police power, however, Lowry's logic is bizarre and contradictory. He acknowledged that Chapter 190, the Florida law under which the Villages district was created, specifically bans it from exercising police power.
Then, he goes on to argue that a different section of the law allows the district to operate a fire department, which he claims is police power.
"It would appear obvious that the fire stations, water mains and plugs, fire trucks and other vehicles owned and operated by the District, which is responsible for fire prevention and control, is an exercise of the police power," Lowry wrote.
Obvious? To whom? Now, there's a stretch. Are firefighters carrying guns and handcuffs these days? The district has said that administrator Janet Tutt is the person to answer questions about the tax dispute, but she did not answer a query seeking an explanation of Lowry's contradictory contention.
And that's not all
Servadio said the bonds also failed to meet other IRS requirements, either. Among them:
The transactions didn't benefit the general public — a requirement of tax-free bonds — but instead only the developer who collected the bond money in exchange for both the facilities and the right to collect amenities fees.
The golf courses, for example, are for the "exclusive use of residents of The Villages," he wrote. Nonresidents can play only at the invitation of a resident, and they can't play at all on some courses that are designated for residents only.
Israel argued that many municipally owned golf courses give preferential tee times to golfers who live in the city. In some places, he said, residents get reduced greens fees, for example.
He cited a U.S. Treasury Department regulation about municipal sewer plants and used it to compare the plants to Villages golf courses. Use of such sewer plants isn't available to people who don't live inside the city, he pointed out, but they are still considered a benefit to the general public. And that's how it is with the golf courses, he argued.
Anybody buying that one? Later, he claimed that "the facilities financed are available for use by the general public."
Really? In that case, let's hold an end-of-the-school-year swimming party for 40 busloads of kids from all the north Lake elementaries! For free! All day! After all, young-uns are "general public," too.
Israel's logic is absurd on its face.
Use of The Villages' facilities generally is restricted to invited guests of Villages residents and the residents themselves, who are paying for the facilities. (Some facilities may be rented by outsiders.) Those conditions may meet the IRS rules or may not; you may like them, or you may not, but that's the way it is. To claim anything else is bogus.
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.
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.
While calculators in The Villages are cooling off from that stressful exercise, let's look at one more claim by the district. This one made 28 pages of tedious reading worth every moment.
Come on in, y'all
Israel made much ado about an IRS assumption that guardhouses and gates at entrances to The Villages are to keep nonresidents out. The IRS conclusion is hardly an outlandish one when a fellow pops out of a little shack at a gate that physically prevents you from driving into the community, and asks where you're going. I've had it happen dozens of times. And these fellows aren't shy about demanding your business.
The truth, however, is that you can tell the nosy gent that you're picking out houses you plan to burglarize next week, and he still has to open that silly gate to let you through. The streets of The Villages are public, and anyone may drive through the development at any time. Putting gates on them is a disgrace and should never have been tolerated. Can you imagine putting gates on U.S. Highway 441 and asking people where they're bound?
The gates are there to keep out the riff-raff and to intimidate gawkers, and for no other reason.
Israel, however, says that's just not the case. The guards don't turn anyone away, he said. The idea is just to slow traffic around golf carts and to "make The Villages a safer place for everyone."
"The guards are there, to provide help, such as with directions, if needed," he wrote.
Yes! They're here to help you! They're here to help the 40 busloads of elementary children get to the swimming pools for use by the general public safely!
Good morning, Security Man. Which way to the Savannah Center pool?
Lauren Ritchie can be reached at Lritchie@orlandosentinel.com or 352-742-5918. Her blog can be found at orlandosentinel.com/laurenonlake
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