June 5 (Bloomberg) -- Billionaire H. Gary Morse, 75, controls almost every facet of life at the Villages, one of the world’s largest retirement communities.
On a 33-square-mile parcel 15 miles south of Ocala, Florida, halfway between Jacksonville and Tampa, he’s built and sold more than 44,000 homes since 1983. He’s created 39 golf courses and developed 4.5 million square feet of commercial space, including two hotels, 60 restaurants and two movie theaters.
Morse owns the local newspaper, a television channel and an AM radio station. His realty company controls 60 percent of the re-sale market in the Villages, whose commercials have been fixtures on the Golf Channel. His bank lends to retirees fleeing south; his insurance company provides them coverage. He even gets paid to pick up the trash and organize tee times. For all his ubiquity, most outside of Florida have never heard of him.
“He’s kind of like the Wizard of Oz,” Andrew D. Blechman, author of “Leisureville,” a book on retirement communities, said in a phone interview from his office in Great Barrington, Massachusetts. “He’s the man behind the curtain. No one really knows him at the Villages.”
In 2011, the Holding Company of the Villages Ltd., which is owned by Morse and his family, generated at least $550 million in revenue, according to regulatory filings. Based on the value of his various businesses and real estate -- plus the almost $1 billion in estimated profits the closely held company has earned over 29 years -- Morse and his family are worth more than $2.5 billion, according to data compiled by Bloomberg. He has never appeared on an international rich list, Bloomberg Markets magazine reports in its July issue.
Morse, who owns at least four jet planes and a 147-foot yacht, has become one of America’s wealthiest real estate tycoons with the help of tax-exempt municipal bonds issued by special government entities he’s created to fund the expansion of the Villages. He plans to use more bonds, which have drawn scrutiny from Florida’s governor and the U.S. Internal Revenue Service, to help fund another 11,000 homes and 4.2 million square feet of commercial space, according to recent bond offering statements.
Gary Lester, a spokesman for the Villages, said in an e-mail that Morse declined to comment for this account.
Special Taxing Districts
Since 1992, Morse has raised at least $1.16 billion through 41 tax-exempt bond and note offerings in 11 special taxing districts, according to documents filed with the offerings. The districts use the proceeds to buy assets and services -- such as golf courses and water utilities -- from Morse, who has earned more than $900 million from the transactions.
Florida state law allows for the special taxing districts, including entities known as community development districts, to issue bonds exempt from federal income tax so long as they perform a “wholly public purpose,” according to IRS guidelines.
Suspecting millions of taxpayer dollars were wrongfully flowing to developers, Florida Governor Richard Scott issued an executive order in January 2012, seeking a review of the state’s 1,600 special taxing districts.
“They aren’t elected officials,” Lane Wright, Scott’s press secretary, said in a phone interview when asked about developers requiring homeowner fees to back munis. “They are not accountable to the taxpayer.”
On March 28, 2012, Morse donated $50,000 to Let’s Get to Work, Governor Scott’s 2014 election fund, according to a donor list posted on its website. His three children each donated $10,000 the same day; the Villages made a $100,000 corporate donation as well. Morse is a co-chairman of the Florida finance committee for Republican Mitt Romney’s presidential campaign.
Developer’s Alter Ego
One person in the state’s Office of Policy and Budget has been gathering information on the special districts, Wright said. Scott, a Republican, should have an estimate as to how long a thorough review will take by the end of June.
Morse’s community districts have also drawn the ire of the IRS, which has investigated whether $426.6 million of bonds issued between 1993 and 2004 by the Village Center Community Development District should have been tax-exempt, according to letters the agency sent the district’s board of supervisors.
“There is nothing about the establishment or operation of the Center District that indicates it has a wholly public purpose,” the IRS said in a memorandum to the district’s board dated April 26, 2012. “The Center District has in effect been operated as the alter ego of the Developer.”
The IRS memo was in response to the district’s request for “technical advice” into their bonds’s compliance with the tax exemption laws. Dean Patterson, an IRS spokesman, said in a phone interview the agency couldn’t comment on anything having to do with a taxpayer, including special government districts. As of May 17, 2012, the investigation was active, according to a brief sent to the district’s board.
A Freedom of Information Act request to the U.S. Treasury Department made by Bloomberg News for more of the correspondence between the district and the IRS was denied April 13, 2012, because tax records are confidential.
The coupon and principal payments for Morse’s district bonds are made using assessments and amenities fees paid by the Villages’s 84,000 residents who shell out as much as $1,740 a year to enjoy their clubhouses, pools and golf courses. None of the Villages’s special districts have ever defaulted on their bonds.
“That’s your perfect issuer,” Andrew Sanford, an analyst at ITG Holdings LLC, a Naples, Florida-based hedge fund specializing in municipal bonds, said in a phone interview. “They issue bonds. Things get built out very quickly. They have good debt service coverage.”
ITG owns two Village Center bonds with a combined face value of $200,000. The company owns $30 million in municipal securities.
Real Estate by Mail
Gary Morse was born to Mary Louise and Harold Schwartz. The couple divorced around 1947, when Morse was about 10 years old. Mary Louise remarried Clifford Morse, according to Blechman. The duo raised Gary in Central Lake, Michigan, where the family ran a restaurant and entertainment complex called Brownwood, according to a Jan. 8, 2012, account in Morse’s Villages Daily Sun newspaper.
Schwartz moved south and eventually purchased a few thousand acres of scrub land 15 miles south of Ocala, Florida. In 1959, he started selling lots by mail. When federal law banned such sales a few years later, Schwartz sold plots to mobile home owners.
By 1983, only 400 lots had trailers on them. At his father’s urging, Morse moved to Florida that year to take over the business. Rather than hawk vacant lots, Morse decided to build homes -- plus pools, restaurants and lots of golf courses -- on speculation, hoping to sell them to retiring northerners.
By 1986, Morse was selling more than 500 homes a year. A decade later, annual revenue crested $100 million. Between 1986 and the first quarter of 2012, the Holding Company of the Villages generated $8.23 billion in total new home sales revenue.
Based on the average annual profit margin of four publicly traded homebuilders with Florida operations, the company has probably made almost $1 billion in profit from those sales.
Morse’s fortune was built by owning almost every aspect of the Villages. The Villages builds the homes through subcontractors; a 1,648-square-foot Colony Villa starts at $120,000, while an upgraded 5,139-square-foot Grandview home sells for $1 million.
When Morse sells the homes, loans to buyers are often made via his $1.4 billion (assets) Villages Bancorporation. A subsidiary, Citizens First Bank, provides consumer-banking services to residents. According to a regulatory filing, the bank was worth $96 million in 2011. Morse and his family own 61 percent of the bank, according to a reply to a IRS questionnaire in 2011.
Morse is the landlord of the Villages’s 4.5 million square-feet of commercial space which houses dozens of restaurants, retailers and doctors offices. A few commercial lots have been sold to retailers such as Target Corp. The remainder is owned by Morse and his children, according to bond offering documents.
The value of these properties is about $400 million, according to data compiled by Bloomberg. The calculation is based on comparable market data -- vacancy rates, rents, and capitalization rates -- supplied by research firm CB Richard Ellis.
In 2006, Morse transferred most of the direct ownership in the holding company to his three children: Mark Morse serves as President of the company; Tracy Mathews oversees Villages design; and Jennifer L. Parr is a director. Gary Morse retained the largest block of voting shares, and is credited with the family’s fortune, according to the methodology used to compile the Bloomberg Billionaires Index.
Property records show Morse owns a $1 million house in the Villages. He has four jet planes -- including a 21-seat Dassault Falcon 900 and two 22-seat Dassault Mystere-Falcon 50s, which can fly 3,623 miles without refueling -- owned through the Villages Equipment Co.
He also has a 147-foot yacht, Cracker Bay, according to the Orlando Sentinel and Tampa Bay Times newspapers. The Cayman Islands-flagged vessel can accommodate 12 guests and a full-time crew of nine, according to Charterworld Ltd.
Morse and his family own 40 percent of Lazy B Cattle Ventures LLC. Current and former employees own the rest of the cattle farm, which uses some of the Florida land near the Villages that Morse plans to develop, according to the IRS.
One-third of Morse’s estimated fortune comes from proceeds from selling assets to the Villages with bondholder money. In 1992, Morse created the Village Community Development District No. 1, the first of 11 entities that have issued $1.16 billion in munis, at least $900 million of which has been paid to Morse for assets and services.
Each time he created a district to issue bonds, Morse created a five-member board to run the community in lieu of a municipal government. The boards that approved 38 of the bond offerings were staffed almost entirely with his employees at the time the bonds were sold. Three of the Villages’s 41 bond offering statements are not available through the Municipal Securities Rulemaking Board database.
In 1993, the Village Center Community Development District issued $26 million in bonds. It used $20.2 million to acquire Sunbelt Utilities Inc., a water utility servicing 5,249 Villages residences, according to the bond offering statement. The district’s board was comprised of Morse and four other Villages employees. Not disclosed in the bond offering statement: the fact that Morse and his father owned Sunbelt, according to Florida state records.
The bond offering included a clause providing $3.69 million in post-sale fees to Morse and his father to connect another 3,351 homes to the system.
Other bond issues show there is no operation at the Villages too small to profit from. In 1996, Village Center CDD raised $17 million to buy assets from Morse, including seven lakes, 12 pickleball courts and 36 holes of golf. The offering included a provision to pay Morse $26,000 annually for taking tee times at those four executive courses.
‘Government by Developer’
The IRS began looking into Morse’s bonds in 2009. Details of the agency’s investigation were revealed when a website critical of Florida development districts posted a letter dated May 4, 2009, from the agency to the Villages.
According to the letter, the IRS said it believed 2003 Village Center Community Development District bonds overpaid Morse for golf courses and other structures. The bonds paid Morse $60 million for amenities that only cost him $7.5 million to build, the letter said.
The IRS also believed some of the assets the district bought from Morse in the 2003 offering were ineligible to be purchased with a tax-exempt bond. One such asset: guardhouses that prevented public access to the Villages even though its roads are public property. At the time, all five members of the district supervisory board were employees of Morse.
The district defended its appraisal methodology, telling the IRS in a subsequent letter that it was buying forward revenues derived from amenities fees in addition to the assets themselves.
The IRS said it also believed Morse violated the intent of the law allowing special government districts by structuring a district with no residents at all and suggested other bonds may be taxable. Florida law indicates developers can create districts -- and appoint their supervisors -- as long as they are 1,000 acres and will eventually reach 250 voters who can independently elect a district board.
The districts were used “to perpetuate this ‘government by developer’ phase indefinitely,” wrote IRS examiner, Dominick Servadio Jr., in a 2009 letter to the Village’s CCD chairman. The May 2012, IRS brief said the agency believed that the 167-acre Village Center CDD and the 432-acre Sumter Landing CDD both failed to meet state requirements to be a district.
In 2009, the IRS requested a settlement requiring the Village Center and Sumter Landing districts to pay $16.5 million tax on the then-outstanding bonds, refinance $355 million of the bonds through taxable bonds, and to refrain from issuing municipal bonds in the future. The settlement was probably declined given the continuing investigation.
Since 2011 another Morse district, the Village Community Development District Number 9, has issued two muni bond offerings. More than $95 million of the $109 million raised went to buy water management assets from Morse.
“The IRS isn’t going to waste its time with the Villages,” Dan Carter, President of hedge fund ITG Holdings said in a phone interview. “There are going to be a lot of others that the IRS will have an easier time proving their point with. The Villages is more gray.”
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