Update: July 27, 2009. As promised, the IRS has expanded its audit of the tax-free status of more bonds after failing to reach a settlement with Community Development Districts at The Villages. The investigation now covers almost $400 million in recreation and other bonds, up from $64 million in the original audit. See the Bond Buyer Story for more.
Original Story: The Villages, the giant active adult community south of Ocala, FL, has received a proposed settlement from the IRS to resolve an investigation of tax-free bonds issued by 2 of its Community Development Districts (CDDs). The Bond Buyer reports that the settlement would mean that the Village Center and Sumter Landing Districts would redeem over $355 million bonds issued in 2003, pay the federal government $2.85 million, and refrain from issuing more tax-exempt bonds. The IRS suggested that if the Districts did not agree to this settlement the Agency might expand its investigation to 7 other bond offerings. Neither the CCDs nor the IRS commented in the article about the IRS proposal.
The Villages is one of 580 Community Development Districts in Florida. These Districts are permitted by Florida law to let homeowners associations issue tax free municipal bonds as a way to finance infrastructure. Topretirements readers may recall in our recent story about The Villages that its complicated ownership structure was a focus of Andrew Blechman in his book about the community, “Leisureville”. It appears that concern is now playing out with the IRS.
One of the IRS’s main contentions is that The Villages’ Development Districts are too tightly controlled by the developer. Florida law requires that, after an initial period, their boards must be controlled by members of the community. Another contention is that the CDDs overpayed for the facilities (golf courses, parks, and other facilities) that the bonds were issued to finance.
The story about the Villages’ bond issue originally broke in the Orlando Sentinel. The Sentinel published a follow-up that explores what the impact of the proposed settlement could be on residents in the Active Adult Community. Since they are the ones paying the debt service and principal, it might logically assumed that resident fees (and possibly taxes) will be going up to pay for a higher bonding cost (tax-free bonds usually have lower interest charges), not to mention any penalties to the IRS. Or, since it appears that it was the developer who profited from its sales of assets to the CDDs, maybe they should pay. Since this is early days in the case, only time will tell. But residents are probably concerned, and many of them angry.