Big trouble in The Villages

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

Ding!

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.

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