11 September 2008

IRS investigating Villages' financing -- PART TWO


Special report COMMENTARY
Before accruing more debt, Villages residents need a voice
Lauren Ritchie
September 10, 2008

(Second of two parts.)

On Sunday, this column looked at an IRS examination of whether bonds issued by the government behind The Villages retirement community should be tax-exempt.

One of the main questions the IRS is trying to answer is whether the Village Center Community Development District, which is controlled by the developer, should be allowed to issue the same kind of bonds that cities and counties do.

To be qualified, the entity must be a genuine government, not just a sham way for the developer to make money.

There is no question that The Villages developer by law is allowed to create governments -- he has set up a dozen of them so far.

Those governments, called community development districts, can have varying powers, but the law allows them to do almost anything that a city or county can, short of operating their own police departments and approving their own growth plans.

A community development district can issue unlimited numbers of bonds, and the Village Center district hasn't been shy about using that power.

That district and a second similar one in the Sumter County portion of the 77,000-resident mega-community on Aug. 31 together owed $281.5 million worth of outstanding loans in the form of recreational revenue bonds.

Board of supervisors

Most of the cash went to Villages developer Gary Morse and his companies. In exchange, the district got real property, such as pools and clubhouses and golf courses. But the majority of the bond money bought something intangible -- a revenue stream. Morse sold the rights to collect amenity fees from homeowners in The Villages. The monthly fee for those buying today is $130, and it is to rise to $135 on Oct. 1.

The IRS agent who has been asking questions about how the district runs quickly homed in on The Villages' way of using the law that governs the districts.

Florida Statutes, Chapter 190, says that a board of supervisors is to run the districts. The first board is chosen by the landowners, which is to say, the developer.

But as the community grows to either 250 or 500 "qualified electors," (depending on the type of district), the five supervisors are to be elected by voters, just as city council members or county commissioners are. This makes sense, considering that the supervisors have the power to levy special assessments, impose property taxes and take private property through eminent domain.

However, the transition to voters didn't happen in the Village Center district, which in April had only 17 landowners. The district still is run by a board of supervisors chosen by the landholders, and the developer has interests in or connections to enough landholders and acreage to control the majority of votes, the district's tax attorney said in a June 12 letter to the IRS.

Today, those supervisors are Gary Moyer, vice president of development for The Villages; W. Thomas Brooks, corporate treasurer of The Villages; John Wise, chief financial officer of The Villages; Stephen J. Drake, purchasing director of The Villages; and Charles Smith, a Morgan Stanley broker with offices in The Villages.

In defense of board, bonds

The power of these men extends far beyond the geographical confines of the Village Center district.

The big money comes from Villages homeowners who each month pay an amenity fee to the Village Center district but who live in other parts of the retirement community. That means they have no say on the board that decides whether to issue bonds.

No wonder the old cry of "taxation without representation" comes to mind.

Janet Tutt, manager of the district, bristled at the statement that the district is controlled by the developer.

She said it's a pure illustration of the city council-city manager form of government.

"I don't answer to H.G. Morse or any of the Morses," she said. "I don't take my directions from them."

Tutt said the bonds were perfectly legitimate and the business of issuing them is conducted by the most reputable of companies, including Citigroup Inc. All of the district's supervisors are upstanding people in the community who wouldn't risk their reputations by participating in anything improper.

"In these bond transactions, we're making sure that we're only paying what the appropriate amount is," she said.

If the developer doesn't like the price, "he can sell it to someone else," Tutt added.

Asked if she had ever suggested the district do anything that was in the best interest of the residents but not in the best interest of the developer, Tutt said no.

"My problem is I don't know what that issue would be," she said.

Debt deprives residents

I can solve that problem.

Because I am not drinking Villages Kool-Aid, I can easily imagine several such scenarios. Here's the most obvious:

Let's say the district board was filled with people who don't work for The Villages and aren't in any way obligated to Morse.

Such independent supervisors might not see any good reason to buy the rights to collect amenity fees for 30 years into the future, thereby saddling residents with almost unconscionable debt. (For example, Villages residents will shell out $134.7 million -- that includes interest -- to pay off the $64 million in bonds the IRS is examining right now.)

If district supervisors had never bought the golf courses or clubhouses or pools -- or the rights to amenity fees -- the developer still would be obligated to provide those things, the district's lawyer said.

But there wouldn't be any bond debt.

Consider that last year, roughly $33 million was collected in amenity fees, and nearly $16 million of it went to pay bond debt, leaving the other $17 million for maintenance and operation of recreational facilities.

Without bonds, that $16 million annually could be going into building and operating even more fun stuff for Villages residents instead of paying off the loans that made Morse rich.

How about free drive-through carwash facilities for residents? Would that be cool or what?

Or community-wide wireless Internet?

Or perhaps the money could go toward eliminating the cost residents have to pay to drive their golf carts on the paths around the courses so they can play that "free" golf for life.

Stay tuned

One thing is clear -- more bond debt is not in the best interest of Villages residents, who already are on the hook to repay $709 million in outstanding loans.

The IRS audit has been going on since Jan. 7, and the district sent its most recent responses to the agent's questions on Aug. 20.

Now it's a waiting game.

Lauren Ritchie can be reached at Lritchie@orlandosentinel.com or 352-742-5918.
Copyright © 2008, Orlando Sentinel

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