WASHINGTON -- The Internal Revenue Service has told two Texas housing authorities that their 1985 black-box bond issues are not tax-exempt because the apartment projects they were to finance had already been built with tax-exempt bonds sold in 1982 by another housing authority.
The IRS warned the Galveston County Housing Finance Corp. and the Baytown Housing Finance Corp. that if they do not agree by Sept. 30 to pay the government all or a portion of the arbitrage profits from the 1985 Raintree and Huntcliff black-box deals, "we will pursue our remedies against the holder[s] of the ... bonds."
The warnings, which did not specify the amount of arbitrage owed, were made in separate but identical letters sent to Bill Eiland, executive director of the Southeast Texas Housing Finance Corp. Mr. Eiland has handled the administrative affairs and been involved with the bond issues of all three authorities for several years.
It was the Southeast Texas housing authority that sold the 1982 issue that financed construction of the Huntcliff and Raintree apartments projects.
The IRS investigation of the 1985 issues raises the question of how three authorities within 40 miles of each other could have two sets of bonds outstanding at the same time for the same projects. Also unclear is why the 1985 issues were each $13 million -- almost $5 million more than each of the 1982 issues that were first sold for the Hunticliff and Raintree apartments.
Mr. Eiland said this week that the 1985 bonds "were going to refinance the old bonds and pay them off" but that "somehow that did not take place."
However, documents for the 1985 black-box issues describe the bonds as revenue bonds and make no mention of the 1982 issues or of any refunding plans. The documents for both the 1982 and 1985 issues say the bonds were sold "to finance the construction, acquisition and equipping" of the Huntcliff and Raintree apartment projects.
"It would be incredibly unusual if not unique not to call the bonds refunding bonds if they were refunding bonds," said one East Coast lawyer who did not want to be identified.
But IRS District Director Arturo A. Jacobs said in the letters to Mr. Eiland that the proceeds from the black-box issues were never used for the projects, which were already completed at the time those 1985 issues were closed. The 1985 bonds were not used for any other projects or for refundings, according to Mr. Arturo. He did not say how the proceeds were used.
But Crown Life Insurance Co. officials this week confirmed that the proceeds from the two black-box deals were locked into guaranteed investment contracts that it provided and that do not mature until Nov. 26, 1993.
The 1982 issue sold by the Southeast Texas housing authority that financed the Huntcliff and Raintree projects was not due to mature until Dec. 1, 1992. But officials with the United States Trust Co. of New York, the trustee bank for the issue, said this week that the bonds were called on Sept. 4, 1990 -- after the IRS began its investigation of the two black-box deals. It is not clear yet what funds were used to call those bonds early.
The 1982 deal was actually six issues grouped as a $39.495 million loans-to-lenders revenue bond deal that was sold to finance six apartment projects. The lender was the Gill Savings Association in Hondo, Tex., which is no longer in business.
The 1982 and 1985 deals are remarkably similar. In 1982, the developers for three of the projects -- Huntcliff, Raintree and Willow Springs -- were Texas limited partnerships that included CCL & Associates of Georgia as a general partner -- the same as the developers described in documents for the 1985 deals.
The addresses for the Huntcliff and Raintree projects also were the same in documents for the 1982 and 1985 deals. And the project descriptions were similar, too. For example, the 1982 deal describes the Raintree apartments project as having 244 units. The 1985 deal says there were 248 units.
The 1982 deal was underwritten by Rotan Mosle Inc., Shearson/American Express Inc., and Merrill Lynch White Weld Capital Markets Group. The bond counsel firm was Foreman & Dyess of Houston.
The 1985 deals were underwritten by Matthews & Wright Inc., which was forced out of the municipal bond business by the Securities and Exchange Commission in 1989. The two deals were among the more than two dozen issues that Matthews & Wright closed without cash. The firm bought the bonds with checks from an under-capitalized credit union and temporarily warehoused them in the Commercial Bank of the Americas, an unlicensed, offshore shell bank. The bonds were not sold for cash to public investors until Feb. 20, 1986.
The bond counsel for the deal was Stubbeman, McRae, Sealy Laughlin & Browder, the firm of James Newman, a lawyer who served time in prison recently under a plea agreement with U.S. Attorneys in St. Louis who have been investigating the black-box deals. Lawyers with the Stubbeman firm did return telephone calls. The trustee bank was InterFirst Bank Houston, now NCNB Texas National Bank. Officials with NCNB could not be reached for comment.
In black-box deals -- so named because their structure is complex and the bond proceeds seem to disappear -- participation interests in the mortgage note to the property being financed are supposed to be sold to third-party investors for cash to buy enhancement. But in many of the black-box deals done in the mid-1980s, the mortgage note was never sold. The bond proceeds were locked into long-term guaranteed investment contracts and were not used for projects.