Update on The Villages big IRS problems (pt. 1)

IRS relentless in probe of Villages bond transactions

Lauren Ritchie
COMMENTARY
August 29, 2010
First of two parts.
OrlandoSentinel.com


A year has passed since the Internal Revenue Service suggested that The Villages retirement community redeem more than $344 million in bonds the IRS says were improperly issued as tax-free.

The agency wanted $16 million in back taxes and a promise by community development districts never again to masquerade as a legitimate government.

The Villages thumbed its proverbial nose at such a notion, and then it was on.

What's happened in the interim may be entertaining for those of us watching from the outside but probably isn't amusing for 80,000 residents of the community that sprawls over Lake, Sumter and Marion counties.

It's got to be unsettling and frightening to wonder what's in store. Not to mention expensive. The district already has spent more than $209,000 of residents' money so far, nearly all on high-powered lawyers on both coasts.

Here's a refresher on the situation:

As The Villages was built, its developer Gary Morse created a form of government called community development districts, the same type scrutinized in this column last week.

Some 294 of these Florida districts have issued bonds, and 42 percent of them are in trouble. Either the districts cannot collect enough assessments to pay for the bonds or the reserve accounts have been raided to make the payments, or the developers behind the communities have gone bankrupt, leaving unsold lots and unpaid assessments.

Villagers can take a deep breath on those fronts. Morse and his family are extremely well capitalized — fabulously wealthy is probably a better description — and because homes in The Villages continue to sell, default on the bonds is an extremely remote possibility.

'Blue-sky' transactions

In the Villages, two main community development districts have sold bonds to buy the infrastructure and recreational facilities — things like lights, roads, sewer and water plants, clubhouses, golf courses, gatehouses and more — from the developer.

That's the way it worked, too, in the other Florida districts that have issued bonds. However, The Villages bond deals differ in two key ways — and that has brought them a load of continuing trouble from the IRS, which contends that the developer perverted law to make himself rich at the expense of retirees who buy homes there.

First, the seats on the district governing boards in other developments typically are turned over to the residents as buyers purchase lots and move in. Not so in The Villages, where the districts selling the bonds in question are controlled by the developer and deliberately are set up so he can keep them out of the hands of residents for as long as he wants.

Second, these districts — remember that they're controlled by the developer — are using part of the bond money to buy "blue sky" from the developer. In this case, it is simply the right to collect assessment fees from residents. The developer gets all the fees in his bank account now instead of having to wait for them to dribble in over 30 years. Lucky residents get to repay the bond through fees — with interest — for 30 years to come.

What a beautifully magnificent source of unfettered, risk-free cash for the developer. The other districts in Florida buy things they can touch, such as water plants. "Blue-sky" transactions haven't been included in their bond deals.

Community development districts that buy infrastructure from developers are a rip-off to the consumer, never mind The Villages' "blue sky" purchases, which are just a secondary piece of legal thievery.

In subdivisions without districts that issue bonds, buyers pay for the infrastructure in the price of the house. In those with districts, they do, too. But in addition, they pay a second time for that infrastructure — with interest — as they pay off the bonds, which often add an extra $20,000 to the price of a house.

Three-year probe

All of this caused the IRS to start looking into the district's bonds three years ago and asking questions about who the district really is and who it benefits. It came to the conclusion that a developer-controlled district benefits only the developer and should not be viewed as a real government with the privilege of the ability to sell tax-free bonds.

The district has contended that it is, indeed, a legitimate government under Florida law and as such, should be recognized as such by the IRS.

Oh, my. What a mess.

Now that you are up to speed on the background, we'll take a look Wednesday at the latest moves on both sides and what they might mean for the average homeowner.

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