As IRS cracks down on The Villages,

Disney World watches

Article Courtesy of The Orlando Sentinel
By Jason Garcia
Published July 16, 2013

  

The federal government recently cracked down on a lucrative tax break used by the developer of The Villages, the sprawling community northwest of Orlando that has been called Disney World for retirees.

That could be an ominous sign for the real Walt Disney World.

In a scathing decision issued in May, the Internal Revenue Service ruled that The Villages did not have the right to use tax-free debt to finance golf courses, swimming pools and other assets. The reason: The Villages sold the debt through an obscure government district whose leaders were ultimately controlled by the developer, rather than the general public, and therefore couldn't be considered real governments.

That's a lot like Disney World's personal government, the Reedy Creek Improvement District, which also gets to use tax-free debt — and whose leaders are all handpicked by Disney.

The head of Reedy Creek said last week that the district's tax lawyers have reviewed the IRS decision and are confident that Reedy Creek is on safe legal ground. Reedy Creek is refinancing $55 million worth of tax-free utility bonds.

"Our bond tax counsel issued an opinion indicating our issue would be in good standing and should proceed," said Bill Warren, a former Disney executive who is now Reedy Creek's district administrator.

But there is clearly some uncertainty. In new legal documents, Reedy Creek warns potential bond investors that its tax-exempt status could come under new scrutiny from the IRS in light of the "breadth and force" of its ruling against The Villages.

The issue has emerged even as a bigger project looms for Disney and Reedy Creek.

In August, Reedy Creek plans to sell up to $360 million worth of tax-exempt, property-tax backed bonds to finance upgrades around the Downtown Disney retail complex. The work includes two new parking garages for visitors, which Disney plans to expand and re-brand as "Disney Springs."

Were Reedy Creek to lose its ability to issue tax-free debt, it would have to pay higher interest rates. That could add millions of dollars to the district's borrowing costs over the life of the loans.

And that would mean higher costs for Disney, which pays about 90 percent of Reedy Creek's taxes.

A spokesman for Disney would not comment.

The IRS probe of The Villages focused on $364 million worth of bonds issued from 1998 to 2003 through an entity known as "a community development district," or CDD.

In a memo issued May 30, the IRS accused The Villages — which is controlled by billionaire developer Gary Morse and his family — of using one of its CDDs to borrow tax-free and then use the proceeds to buy assets from companies controlled by the Morse family, often at a substantial markup. Some of the money was used to buy facilities such as boccie courts, but even more was used simply to buy the right to collect future fees from Villages homeowners.

But what the IRS ultimately objected to was the way the CDD's governing board was set up.

Hundreds of developers across Florida have established CDDs through the years, thanks to a 1980 state law designed to let private developers create their own governments in order to more cheaply finance their projects. Generally, the governing board of a CDD is initially controlled by the developer. But power eventually transitions to residents as the development is built out.

But The Villages' CDD was structured to keep the developer permanently in control.

"We believe that an entity that is organized and operated in a manner intended to perpetuate private control, and to avoid indefinitely responsibility to a public electorate, cannot be a political subdivision of a state," the IRS wrote in its ruling.

Perry Israel, an attorney representing The Villages, said his client is still weighing its options "to come to some sort of settlement with the IRS."

There are many key differences between The Villages' CDD and Disney World's Reedy Creek, which was specifically created by the state Legislature as part of package to entice Walt Disney to build a new East Coast theme park, plus a future residential community that was never realized.

But both entities are similar in how their leaders are chosen. Like The Villages' CDD, Reedy Creek supervisors are elected by landowners. That gives Disney, which owns roughly two-thirds of the acreage, total control.

What's more, only landowners are eligible to be elected to Reedy Creek's board. Disney fulfills that obligation by giving its preferred candidates 5 acres of land — which they are contractually bound to give back should they ever leave Reedy Creek's board.

The similarities are enough that Reedy Creek lawyers warned prospective bond buyers that the IRS may raise objections.

In new bond-offering documents, Reedy Creek says the IRS ruling against The Villages is "extremely limited." But it then adds: "Nevertheless, the breadth and force of the language used in The Villages TAM [technical advice memorandum] may reflect the disfavor of the IRS toward governmental entities with governing boards elected by landowners, and this position may lead the enforcement branch of the IRS to select bonds of other issuers with landowner-controlled boards for examination."

The Villages' case, it adds later, "may cause an increased risk" of a future IRS probe for Reedy Creek's tax status.

Whether the IRS actually intends to scrutinize Reedy Creek is unclear. A spokesman for the agency said he could not comment on the issue.

  

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