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Community's feud with IRS could spell trouble for developments throughout Florida

The IRS says tax-free money should not have been used to build gates that stop people from entering public roads. The Villages managers say the gates slow traffic and make roads safer.

MARLENE SOKOL | Times

The IRS says tax-free money should not have been used to build gates that stop people from entering public roads. The Villages managers say the gates slow traffic and make roads safer.

OCALA — To believe the advertising, this is "Florida's Friendliest Hometown."

Golf carts at The Villages share the road with sedans that say "Senior Power" on their bumpers. Retirees go to camp with their grandchildren. There is bridge, bocce ball and a tennis substitute called pickleball.

And there is golf, at courses that are now under the harsh glare of the IRS.

In a dispute that's anything but friendly, agent Dominick Servadio has accused a community development district in The Villages of misusing $64 million in tax-exempt bonds and overpaying for courses, guardhouses and other amenities. He has leveled accusations of self-dealing, lax oversight and questionable accounting.

With 600 such taxing districts statewide, including 116 in the Tampa Bay area, the feud is being closely watched by those involved with planned communities. Issues that trouble the IRS at The Villages could exist in communities closer to home.

Legal scholar James Nicholas, who helped write the 1980 legislation that created community development districts and was interviewed extensively by Servadio, said the audit raises basic questions about allowable uses of tax-exempt money.

"Who knows how far this is going to go, and what criteria are going to be used to distinguish between public and private?" he said.

While the situation at The Villages might be extreme, he said, "others are a little bit that way, and some more than a little."

Said Orlando tax lawyer Peter Pappas, "I think a lot of people are breaking out in hives on this one."

Unusual arrangement

Conceived to help roads and utilities keep pace with population growth, community development districts let developers sell bonds — at a favorable rate because buyers do not pay tax on the interest — and spend the proceeds on new communities.

As families move into the homes, they take control of the districts, as happened in Tampa Palms, Westchase and dozens of communities around Tampa Bay.

The Villages, which straddles three counties and has 77,000 residents, has a dozen community development districts — some with homeowners and some without. Commercial landowners elect the governing board of the Village Center district, which provides management services for the rest. Most members of that board have business relationships with the developer.

That's one set of issues laid out in a 104 report the IRS issued in January.

In it, Servadio also wrote that the Village Center district does not qualify to issue tax-exempt bonds for several reasons: Among them, it has no police power.

He alleges that a developer controlled by the founder's son made a 700 percent profit for building the community's amenities. And, he added, the purchases didn't serve the public interest because the golf courses are reserved for Villages residents and their guests, and the gates limit the public's access to roads.

In May, he proposed a settlement: pay $2.8 million in back taxes; buy back more than $300 million in bonds; and agree not to issue tax-exempt bonds.

Safety, not exclusion

Lawyers for the community development district, far from agreeing to any settlement, insist that their district is a qualified government under Florida law.

The golf courses are no more exclusive than a utility for a city's taxpayers or favored treatment for residents at a municipal course, they contend.

The gates are for safety, not exclusion. With arms that go up at the touch of a button, they slow traffic so pedestrians and golf carts can pass safely. "If we didn't have those gates, we'd have dead residents," said district manager Janet Tutt.

As for the accounting methods? They are standard practice, said Tutt, who has worked for governments in Marion County and Ocala. "I have been involved in a number of utility purchases," she said. "We did not just buy the infrastructure. We also purchased the customer base."

It gets personal

But the dispute has moved beyond accounting and tax law, and into the realm of personal attacks.

When a Villages lawyer took offense at Servadio's phrase "primarily a golf course community," the agent devoted nearly a full page to a mocking response.

"Do you guys in Florida get the same TV ads that The Villages bombards us Northerners with?" he wrote. "Maybe it's the fact that when you go to The Villages home page, the first thing you see is the logo which is a photo of a golf course."

Statements such as "this one actually made me laugh out loud when I first read it" and "if I were a resident of the Villages I would be outraged" appear throughout the IRS agent's communications.

So biting is his language, Village Center complained to IRS managers, accusing Servadio of acting unprofessionally.

Pappas, the Orlando lawyer, suspects Servadio has his supervisors' backing. And he would not be surprised if the IRS took a hard look at other bond issues, in their drive to lessen the federal government's deficit.

"Two years ago, I would have said no," he said. "Now all bets are off."

Locally, issues about community development district governance, gates and guardhouses aren't uncommon.

In 2002, the Hillsborough County Commission cracked down on gates that blocked public and community development district-financed roads, including those at Heritage Harbor in Lutz. Guards were told they could question motorists, but not prevent them from entering.

In New Tampa's Cory Lake Isles, lots sold so slowly that developer Gene Thomason, his family and associates dominated the district for more than a decade. Thomason had a communitywide landscape contract. His wife and son ran a real estate office in the clubhouse, paying little or no rent. In November, residents assumed control over the board, signaling an end to both arrangements.

The Thomasons continue to control the homeowner association and development business, and two lawsuits are pending in which residents are seeking financial records, said the residents' lawyer, Mark Basurto.

"If I were the all-powerful Oz in these communities … I would want them to transition more quickly to the residents," Basurto said. "Get it out of the hands of the developer."

Cause and effect

In The Villages, for example, Servadio draws a direct link between developer influence on the board and what he considers an improper use of bond money.

The "district," he wrote in a letter to The Villages attorneys, is "really nothing more than a five-member governing board populated with developer employees or related parties." That board has a history, he continued, of borrowing money, tax-free, to buy assets from the developer in deals "that in the real world would never pass scrutiny as arms-length transactions."

Unsuccessful in arranging a settlement, Servadio has expanded his investigation. He is looking at more bonds issued by the Village Center, and has requested information from another district in the group.

Tutt's staff, the homeowner association and the independent Property Owners Association are working to calm residents' fears.

But no one can predict the affect the publicity will have on property values, or where the money will come from if the district is forced to pay. Community leaders have invited Servadio for a visit. Tutt wonders why he is pursuing them so relentlessly.

"I've worked for government," she said. "And this goes against what government can be and what government should be."

Marlene Sokol can be reached at (813) 269-5307 or sokol@sptimes.com.

Community's feud with IRS could spell trouble for developments throughout Florida 08/08/09 [Last modified: Sunday, August 9, 2009 7:59am]

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