30 April 2009

Big Trouble in The Villages (Part 2)


Peeling back layers in Villages bond dispute
Lauren Ritchie
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.

Developer overpaid?

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.

Documents 'recreated'

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

Copyright © 2009, Orlando Sentinel

Active Adult builders slashing production of new homes

29 April 2009

Big trouble in The Villages


Can Villages win battle over bonds?
Lauren Ritchie
April 26, 2009
(First of two parts.)


That's the signal for the kickoff of Round No. 2 in a battle between the government behind The Villages and the IRS, which has warned that tax-exempt Villages bonds are in danger of being declared taxable.

The Village Center Community Development District, which runs operations at the massive retirement community of nearly 75,000 people, sold $64 million worth of bonds in 2003 to buy everything from the right to collect future fees from residents to retention ponds, clubhouses, swimming pools, guard shacks and golf courses.

Even more troublesome for the district are Internal Revenue Service hints in the agency's preliminary ruling that similar bonds — $214 million outstanding in all — also could be declared taxable.

Before anything drastic happens, the Villages district has the right to present its argument, and in documents prepared by two lawyers — its local attorney in Mount Dora and a tax-exempt bond expert in California — the district did so last week.

The arguments are technical and sometimes double back on themselves, leaving the reader with a "huh?" expression.

Here is the condensed version of The Villages' argument:

The state says this whole arrangement is just peachy, so who is the IRS to question it?

The documents acknowledge much of the too-cozy arrangement between the district and developer but argue that it's just dandy — or, at any rate, perfectly legal — because Florida sanctioned it all.

The IRS doesn't have any business meddling, for example, in trying to determine whether the district is a bona fide "political subdivision." Florida says it is, so, by golly, it just is.

What the local lawyer has forgotten is that the IRS isn't part of Florida's long-standing good-old-boy system that conspired to make developers rich at the expense of retirees who just want to have fun.

Just because Florida considers the Village Center district an honest-to-goodness government with power to issue tax-free bonds doesn't mean the IRS has to recognize it ... or does it?

This case will be a test.

At one point, Mount Dora lawyer Archie Lowry Jr. remarked that the way the district board is made up is "not favored" by the IRS, even though it complies with state law governing community-development districts such as the Village Center District.

"I am not aware of any federal law which would permit the IRS to change, modify or rewrite Florida statutory law," Lowry wrote.

Yo, Archie, dude! Didn't anybody mention that being snippy with an IRS agent may not be the wisest tactic when $214 million is at stake?

The money from the sale of the recreational revenue bonds went to Villages developer Gary Morse and his family, for whom he holds most of the development in trust.

The deal worked like this: Morse built The Villages and supposedly didn't charge residents in the sale price of their houses for any of the recreational goodies.

Instead, homeowners pay an "amenity fee" that varies, depending when they bought their house. Anyone who buys now pays $135 a month. Those who bought in past years pay less.

The district issued the bonds and repays them with amenity fees. The bond money bought not only the tangible items but also the rights to the collect the fees — and that's where part of this disagreement is rooted. The IRS contends that buying intangibles such as "rights" is improper.

The district expects to collect about $33 million in amenity fees this year and spend about half repaying the bonds that made the Morse family fabulously rich. The rest goes for operations.

But perhaps the biggest battle is the IRS contention that the Villages Center District is not a genuine political subdivision under IRS rules and so can't possibly issue tax-exempt bonds.

If that preliminary ruling were to hold, more than $700 million in various types of outstanding Villages bonds could be at risk.

Now that the backdrop is set, let's look at the specific responses from the Village district on Wednesday.

Lauren Ritchie can be reached at Lritchie@orlandosentinel.com or 352-742-5918. Read her blog at orlandosentinel.com/laurenonlake.

Copyright © 2009, Orlando Sentinel

11 April 2009

Reader email


First, let me say, that we are a married couple from upstate NY, are and still working. We have 4 children, all of which have left the nest and are doing well. We stumbled upon The Villages around 5 years ago, in the month of February, when visiting long time friends that had moved there the previous year. Previously we disliked Florida; too much traffic, too hot; nobody was from here and many other things. After spending 4 day’s in The Villages with our fiends, we bought a Villa before we left Florida.

We ordered furniture, had it received and placed by our friends and came back in April for a couple of weeks to get it settled. The first night spot we hit after tending to the villa for a couple of days was Katie Bells. We sat down and ordered 2 Absolutes and sodas. The bar maid said $6.50, I said each, she said for both. An older gent sitting next to us said “if you bought those 3 weeks ago they would have been $1.50 cheaper. I said they seem pretty reasonable to me. We looked around to see much older couples dancing. I said to my wife, it’s just like the old days when us guy’s were out on weekends trying to pick up girls. This is really something I told her. The more I watched, I didn’t know if I wanted to laugh or cry.

Well, its 5 years later and we have moved up to a designer home. We still are working in NY so only get here for about 4 weeks at a time in the winter. We call ourselves snow flakes as opposed to snow birds because we aren’t here enough.

I caught the article about your book in the NY Post a couple of months ago and finally bought and read your book. Let me first say, I took some heat from some people here, they were not happy about your book. I read the book and found it to “not to be” what they professed it to be. It is very thought provoking from my point of view. I did report my findings to all those doubters. When I explained it to them, they seemed to be enlightened; “you mean it’s not just about Mr. Midnight”? I found your contacts here to be informative and, yes, some very entertaining. One disappointment to me, you never finished your investigation of the wine club.

I now find myself kind of agreeing with you to a point. Is it really impossible for us not to still fulfill all those responsibilities you claim we have to the next generations and still enjoy our final years here? I think we can do both but I applaud you for making the point that it is sort of our duty.

However, I must disagree with your long term thoughts on The Villages. You state age-segregated communities will in the future start to thin out from lack of population, but as with any species, the strong will prevail and so will The Villages. Its shear size and the number of amenities, will keep it the place to go. I am afraid you are right on the other’s, being so small, they will have to change there qualifications to survive in the future.

In closing, let me say, I think Leisureville is a great book and I am recommending it to all that will listen to me.

John C.

10 April 2009

The (MA) adult-community development bubble has burst.

Friday, April 10, 2009
Developers endure a senior slump as over-55 market hits wall
Boston Business Journal - by Michelle Hillman

Ocean Meadow developer Stephen Gillis is offering prospective buyers $15,000 toward the purchase of a unit.
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The adult-community development bubble has burst.

Earlier this decade, developers pursued aging boomers with gusto, building hundreds of “active adult” communities across the state. They banked on the assumption that empty-nesters would want to live out their golden years in maintenance-free homes, often complete with clubhouses and golf courses.

Now the 55-plus market is glutted with inventory. Some developments are in foreclosure, others are stalled and prices on some units reflect deep discounts, as the expected rush to adult communities has not materialized. An estimated 15,000 units are permitted or sitting on the market in Massachusetts.

The glut can be attributed to the housing slump and market crash. Boomers struggle to sell their homes and their ravaged retirement accounts make the care-free lifestyle that 55-plus communities promise more elusive. Since 2000, developers have built 311 active adult communities and 19,458 units, according to PrimeTime Communities LLC, which researched the market for its 2009-Prime 50 Plus Report. The report found that sales of units in 25 adult communities slowed from between three and six units per month at the peak of the market in 2006 to 0.5 a month, or one every other month, in 2008.

“The key factor is a decline in pricing, really, for the single-family homes,” said Thomas Skahen, a partner at PrimeTime. “People saw their housing values dip 10 to 20 percent and their stocks went down 40 percent.”

Stephen Gillis, president of Gillis Homes Inc., is offering prospective buyers a $15,000 “stimulus check” toward a unit at Ocean Meadow at West Newbury. The idea for the check came about after Gillis sold just one unit at in January. The 55-plus project was built in the spring of 2007 “when things were wonderful,” said Gillis.

“The big issue is people being able to sell their house,” said Gillis.

Developers with parcels permitted for 55-plus development are standing still, said Lynne Sweet, a principal at Needham-based market research firm LDS Consulting Group LLC. Those with land are unable to get financing and those with 55-plus projects permitted are trying to get the age restrictions lifted.

“On top of the fact that these things were incredibly over-permitted and not well thought out,” she said.

The developer of Yentile Place in Wilmington can’t get the project out of the ground until he can get a loan from a bank, said Bill Wolfe of Wilson Wolfe Real Estate. Wolfe said the bank won’t budge without 12 purchase-and-sale agreements in hand. Wolfe has only been able to line up seven at his 76-unit project.

A call to the developer was not returned.

“The longer it sits, the more concerns people have,” said Wolfe, adding that the developer has only managed to pour the foundation.

For those who moved ahead with active adult communities, it’s a fire sale.

Even with all the bells and whistles retirement living has to offer, the units are selling slowly, if at all. In Stoughton, the owners of the Village at Ames Pond reduced asking prices by $100,000 to about $340,000 last October to spur the sale of the last 11 units at the 40-unit development. The property was finished in 2006 and was expected to sell out in a 12-to-18-month period.

“We pretty much came on the market at the worst time we could’ve come on,” said Christa Griffin of Griffin Realty LLC.

Some developers haven’t been able to finish building 55-plus projects because of a lack of sales and financing.

The active adult community in Sharon, Hunter’s Ridge, has been quiet for a long time, said Tammy DeWolfe of Coldwell Banker Residential Brokerage. DeWolfe said the property went into foreclosure and the owners, the Charles Mirrione Trust, stopped building when units weren’t selling.

However, Charles “Nick” Mirrione, president of Mirrione Realty Corp. of South Easton, said he’s found a buyer for the project and expects the sale to close May 11.

“We weren’t able to keep up with the project,” said Mirrione, who added he’ll lose more than $6 million on Hunter’s Ridge. “There was no way I was ever going to make any money on it under these conditions.”

“For now I think people are just sitting on their hands and it would be very difficult for anyone to get financing in the future because there’s so much product sitting out there that’s failed,” Sweet said.


Pulte (owner of Del Webb brand) dilutes concentration on Active Adult sector

April 8, 2009
Pulte-Centex deal prompts hope, wariness

News of the merger of Pulte Homes Inc. and Centex Corp. to create the nation’s largest homebuilder was met with optimism and caution Wednesday.

One analyst even saw it as a liquid Pulte coming to a debt-heavy Centex’s rescue.

“We view this deal as a necessary and positive step for CTX given its 56% leverage, $1.2 billion debt maturities over the next three years and our expectation for weak cash flow,” wrote housing analyst Daniel Oppenheim at Credit Suisse in a note to investors Wednesday.

The combined business has more than $3.4 billion in cash as of March 31, the companies said, and $1.8 billion in debt.

Oppenheim also notes that the combined company would have eight years worth of land based on an estimated 20,000 home sales for both this year.

The two companies had sales of 39,000 homes in 2008 with revenues of $11.6 billion.

Liz Boyd, spokeswoman for Gov. Jennifer Granholm, said the merger is great news for the company and the state, particularly as it will stay headquartered in Bloomfield Hills.

“There are a lot of unknowns whenever you have a merger of companies,” she said. But to have this company headquartered in Michigan is very important. We have the bragging rights to be home to the nation’s largest homebuilder.”

The merger fills in some gaps for Bloomfield Hills-based Pulte in the first-time homebuyer market and reduces its exposure to the active adult market, which accounted for 45% of its business last year but will total 29% after the merger, Oppenheim wrote.

Pulte also estimated it would save $350 million a year in expenses after the merger.

Howard Fingeroot, managing partner of Pinnacle Homes of Farmington Hills and former president of Pulte Land Development, said the building industry was in consolidation mode prior to the housing and financial industry meltdowns.

“I think this merger with Pulte and Centex is something to generate optimism. It tells me they are looking forward. It’s not just how do we get through today,” Fingeroot said. “They are going to be the biggest homebuilder in the country.”

Ken Dalto, a Farmington Hills-based turnaround expert, said the homebuilding industry was ripe for a right-sizing similar to what is happening in the automotive and financial industries.

“There is so much inventory of houses, Pulte won’t have to build houses for years even when there is a recovery,” Dalto said. “There is not going to be a lot of building and the housing industry is going to be a lot slimmer for a number of years.”

The company will be named Pulte and be headquartered in Bloomfield Hills with a significant presence in Dallas where Centex is based.

Pulte has battled complaints about quality and working conditions lodged by homeowners and the AFL-CIO in recent years. Last year, a group of protesters clashed with Pulte’s board of directors as they arrived for the annual shareholder’s meeting.

The company has said it does all it can to address such complaints. Pulte and its Del Webb brand ranked highest in 11 of 34 markets in the 2007 J.D. Power and Associates New Home Builder Satisfaction Study.

The merger is subject to shareholder approval at both companies.