August 21, 2014

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IRS Challenge to Community Development District Bonds

Lawyers, engineers, financial advisors, bond underwriters, and district managers who serve Florida Community Development Districts (“CDD’s”) are on the edge of their seats.  They are all anxiously awaiting a final pronouncement from the Internal Revenue Service that has been pending for more than four years and which could have a drastic effect on the future of CDD financing.  An IRS decision in the form of a Technical Advice Memorandum is expected in the near future.

Early in 2009 the IRS sent to the Village Center Community Development District (the “Village CDD”) a Form 5071 Notice stating that it would be looking into certain issues relative to the tax exempt nature of $64,000,000.00 of bonds issued by the Village CDD in 2003.  The IRS described the issue as whether the Village CDD was a Qualified Issuer of tax exempt bonds. 

In January, 2010, the Village CDD sent to the IRS a request for technical advice with respect to two issues:

  1. Whether the Issuer is a political subdivision within the meaning of the income tax regulations, and
  2. If the Issuer is not a political subdivision, whether its debt is issued on behalf of a State or local government unit within the meaning of the treasury regulations. 

The IRS has postulated that the Village CDD may not be a political subdivision because a single private developer/land owner controls a majority of the votes and elects the board of supervisors of the Village CDD and thus controls the CDD.  The Village CDD through its attorneys has argued that, in fact, the Village CDD is a governmental entity under state law and a political subdivision of the State of Florida, citing much precedent and legal support for that conclusion.  Copies of the arguments of the Villages can be found in the Villages CDD website www.districtgov.org under the dropdown “IRS Updates.”

The issue has attracted the concern of the National Association of Bond Lawyers (“NABL”).  As expressed by NABL, an adverse position by the IRS “could substantially undermine the market for special district bonds, a long standing form of financing utilized by a wide range of issuers in many states.”  Many other states have statutes similar to the Florida Chapter 190 CDD provisions and have created their own bond issuing special districts with much the same purpose and governance structure as Florida CDD’s. 

At a January 25, 2013 seminar on Florida CDD’s, sponsored by The Florida Bar Association, several of the seminar speakers stated that in the present circumstance of not knowing what position the IRS will take, the issuance of an unqualified tax exempt opinion by bond counsel is unlikely.  Without a “clean” tax exempt opinion, it would be impossible to market CDD bonds at tax exempt rates. 

It is possible that the Village CDD will prevail and the IRS will soon issue a Technical Advice Memorandum finding that the Village CDD is in fact a political subdivision capable of issuing tax exempt bonds. This result would be a great relief not only to the Village CDD, but also to the over 560 CDD’s currently existing in Florida and to the many similar special districts existing in other states across America. If the Village CDD does not prevail, tax lawyers will carefully study the decision to understand the IRS's final reasoning.  They will try to determine if the IRS decision will be applied broadly to all CDD’s, or just to those CDD’s in which a small group of landowners elect the CDD board, or to the unique facts specific to the Village CDD. 

A number of participants in The Florida Bar seminar described the economic and social benefits to the State of Florida that have resulted from the use of CDD financing.  CDD’s have allowed the private bond financing of public infrastructure improvements in what are some of the nicest residential and commercial developments in the State of Florida, and have also provided a vehicle for funding ongoing operation and maintenance of the infrastructure developed with that financing.  The IRS decision could have a far reaching impact on future development not only in Florida but in many states in which special districts similar to the Florida CDD’s have been formed. 

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2014. All rights reserved.

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About this Author

Michael, Ryan, finance, real estate, attorney, Lowndes, law firm
Partner & Chair, Distressed Real Estate Solutions Group

Mike Ryan is a partner who practices in the areas of real estate transactions, development and finance; banking and financial services; and public finance.

In the area of real estate transactions, Mike has represented investors, operators, landlords, tenants, and lenders in the acquisition and financing of all kinds of asset classes including big box retail, shopping centers, office, industrial, residential (multi family and single family sites), condominiums (residential and office), hotels, ski villages, golf courses, and other portfolios.

As a lender’s counsel, Mike...

407-418-6355
Miranda F. Fitzgerald, Lowndes Law Firm, Real Estate Attorney
Partner

Partner Randi Fitzgerald focuses her practice on land use, zoning, environmental matters and real estate development, including comprehensive planning, Developments of Regional Impact (DRI's), annexation, concurrency, vested rights and property rights issues. She has served as lead counsel for more than 35 DRI's and has represented both property owners and local governments. She represents clients in all phases of development for commercial, residential and mixed-use projects, including site selection, due diligence, and procurement of land use approvals and entitlements.

407-418-6340