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IRS Auditing $39M of Defaulted Florida CDD Bonds

By Lynn Hume - Bond Buyer

WASHINGTON — The Internal Revenue Service is auditing $38.77 million of defaulted special assessment bonds that were sold in 2005 by the Aberdeen Community Development District in Florida to finance infrastructure for a residential community. The audit was disclosed by district officials in a material event notice they filed Wednesday with the Municipal Securities Rulemaking Board’s EMMA system.

The IRS informed the district of the audit in a March 7 letter, saying it is “part of a project initiative involving governmental bond issues.” Cliff Gannett, director of the IRS’ tax-exempt bond office, told The Bond Buyer in December that the IRS has begun an initiative in 2010 to audit developer-driven deals such as special district financings and would continue the program in 2011.

The IRS sent the district a five-page request for information and documents, including the bond transcript index and distribution list, the tax or non-arbitrage certificate, a description of the project, and details of expenditures and uses of proceeds, as well as rebate or yield reduction calculations and payments. The IRS also asked for details about any related transactions such as hedge agreements and credit agreements.

The bonds were sold to finance part of a capital improvement program that involved the acquisition or construction of roads, water and sewer improvements, recreation, and other facilities for a 1,313-acre master-planned residential community located in northwest St. Johns County, about 20 miles south of Jacksonville and 15 miles northwest of St. Augustine.

The development was to contain 1,553 single-family units, 394 multifamily units, 100,000 square feet of commercial office space, a recreational facility, and a future elementary school.

The bonds are limited obligations of the district payable solely from the special assessments the district levies on landowners, reserve funds or other pledged amounts. But bond documents show that the initial debt service payments were made with reserve funds.

On Feb. 25 of last year, U.S. Bank NA, the trustee, notified bondholders it was making an interest payment on the bonds for the period from May 1, 2009, through Oct. 31, 2009. The notice was filed with EMMA. However, the bank said: “Except with regard to the Nov. 1, 2009, interest payment, no assurance can be given as to the amount of payments, if any, to bondholders.”

On Sept. 24, 2010, Carr, Riggs & Ingram LLC issued its audit of the district’s fiscal year ending Sept. 30, 2009. The auditor said that as of Sept. 30, “the liabilities of the district exceed its assets by approximately $33.4 million.”

The bonds were underwritten by Prager, Sealy & Co. Bond counsel was Squire, Sanders & Dempsey LLP in Miami. Underwriter’s counsel was Greenberg Traurig PA in Orlando. Hopping Green & Sams PA in Tallahassee was counsel for the district.