Article Courtesy of The Orlando Sentinel
By Eloísa Ruano González   
Published June 15, 2013 

An IRS ruling that The Villages didn't have the right to use tax-exempt bonds to finance millions of dollars' worth of golf courses and other amenities has left residents worried they'll wind up paying a big bill.

Retirees in the fast-growing development northwest of Orlando are confused about what the decision could mean for them, said Rich Lambrecht, a Villages resident who sits on a committee that oversees how some amenity fees are spent by a quasi-government known as a community-development district.

The burden of paying taxes on the bonds' earnings as the result of the Internal Revenue Service decision ultimately falls to bondholders. But the district's board might be willing to cut a deal with the IRS because bondholders almost certainly would band together to recoup any losses and penalties from the district, said Jim Moye, chief deputy comptroller for Orange County and an expert on tax-free bonds.

Villages residents worry that some amenity fees — the district's major source of revenue — will be diverted to pay the tab, Lambrecht said. The district collects about $35 million a year in amenity fees, which residents pay to maintain recreational facilities.

"We're hoping the IRS will come up with a reasonable solution that won't affect bondholders or residents, who received no benefit from issuing tax-exempt bonds," he said.

Richard Lehmann, a financial adviser and president of Income Securities Advisors in South Florida, also said a likely outcome is that the district — which is controlled by Villages developer H. Gary Morse, a force in national Republican politics — will pay a fine to prevent the federal agency from going after bondholders.

"There are a lot of people who are on the hook here," Lehmann said.

Villages residents have been concerned since learning last week that the IRS decided the Village Center Community Development District is not eligible to issue tax-exempt bonds. 

The district sold $426 million in tax-free bonds from November 1993 through June 2004, including $364 million worth of bonds that were under scrutiny in the five-year IRS probe. The district used the borrowed money to purchase boccie-ball courts, golf courses, swimming pools and other recreational facilities from Morse, whose fortune is estimated by Bloomberg News at $2.9 billion.

The IRS said in its May 30 decision that control of the district's board was never intended to be turned over to residents and therefore could not be considered a "political subdivision" of the state with the authority to issue tax-free bonds. 

The potential impact of the decision beyond The Villages is also causing fears.

Last fall, when the agency issued its proposed ruling on the tax-exempt issue, U.S. Sen. Bill Nelson, D-Fla., sent a letter to then-Treasury Secretary Timothy Geithner in which he argued that a "far-reaching conclusion" from the IRS in The Villages case could impact other community-development districts, "paralyze bond markets" and create a "chilling effect" on the state's economy.

"In light of the significant implications of this issue for federal tax policy and our economic recovery, I request that this issue and its potential downstream consequences be carefully considered …," Nelson wrote in the letter dated Oct. 26.

According to Nelson, more than $9 billion in tax-free bonds have been issued by such districts in the state since 1999. Florida has about 600 community-development districts, most of which were created during the boom period from 2003 to 2008. The special districts have been an important tool for developers to keep costs low in building roads, recreational facilities, utilities and other services through assessment fees and tax-free bonds.

Perry Israel, a California attorney representing the Villages district who disputed the agency's findings, said the scope of the IRS decision "is really unclear" and could create concerns over whether new and existing bonds issued by other districts are tax-free.

Israel said the district is weighing its options on how to proceed with the case, but it's "too soon" to tell. District officials said they have spent more than $700,000 defending their position. Israel said he hasn't calculated how much in back taxes is owed.

Janet Tutt, the district manager, said she's trying to make sure the ruling doesn't cause "additional angst or worry" for residents.

The ruling might have a stifling effect — at least at first — on the use of tax-free bonds by community-development districts, said J. Ben Watkins III, director of Florida's division of bond finance.

If interpreted broadly, the IRS ruling is "troubling," particularly in states such as Florida, California, Colorado and Texas, where special districts are popular, he said.

"It's going to create uncertainty going forward until there is a resolution or until the finance side of this industry, the bond world, comes to grips with what this means in the CDD world," he said. "And to the extent that it causes some question, it's going to freeze or have a chilling effect on the use of CDDs to fund infrastructure."