A lawsuit settlement turned into a real estate transaction at millions over market price.

SARASOTA -- Five years ago, congressional candidate Vern Buchanan settled a lawsuit he filed against developers of Sarasota's Ritz-Carlton Hotel for $1.35 million.

Instead of a cash payment, Buchanan and Ritz co-developer Robert Buford worked out a real estate deal in which Buchanan bought a penthouse apartment from a member of Buford's family for $5 million, held it for just more than a year and sold it back to another member of Buford's family for $6.35 million.

The deal had benefits for both sides.

Buchanan got his $1.35 million and saved about $260,000 in taxes by paying capital gains taxes at the 20 percent rate instead of income taxes at the 39.6 percent rate.

At the same time, Buford benefited because potential buyers checking property records would see that a Ritz penthouse had been sold to a wealthy car dealer for the record price of $5 million -- nearly $2 million more than any other condo in the building.

To date, county records show that the highest price paid for a Ritz-Carlton condo -- excluding Buchanan's -- was $3.3 million in March 2003.

Because Buchanan and his two partners used the penthouse for scores of charity benefits, developers of the tower also were handed an opportunity to showcase the Ritz experience to hundreds of the richest people in Southwest Florida and beyond.

What is more, Buford got to use Buchanan's $5 million for a year and did not have to pay taxes, insurance or condo dues on the unit during that time.

The settlement between Buchanan -- a multimillionaire who just won the Republican primary to succeed Katherine Harris -- and Buford, a wealthy Kansas developer, was supposed to remain secret.

But now that some of the details have been revealed, questions are being raised about the way in which Buchanan avoided income taxes and the manner in which his penthouse was appraised.

Deals involving the rapid, overnight appreciation of properties have caught the attention of Southwest Floridians this year, raising concerns about how appraisers value real estate and how those appraisals affect taxpayers and the market.

In this case, recorded deeds show that Ritz developers valued Buchanan's penthouse at $2.368 million on Jan. 14, 2002, and then sold it to Buchanan for $5 million the following day.

"When a transaction is concocted to avoid tax, when it is not at arm's length, when no normal person would have paid $5 million for a property and no normal person would have paid $6.35 million to buy it back, that's a transaction the IRS would be extremely interested in," said Rick Lanese, a tax accountant in Sun City Center.

"The IRS investigates these sort of cases all the time."

Four other certified public accountants contacted by the Herald-Tribune reached the same conclusion.

Buchanan and his attorney, Robert Messick of Icard Merrill in Sarasota, say the deal was legitimate.

"This was a structured settlement," Messick said. "There was nothing underhanded about it. The appraisal was done by a reputable company, perhaps the most conservative in town."

Messick declined to identify the appraisal company or to provide a copy of the appraisal.

As to paying capital gains taxes rather than income taxes, that was just good business, Messick said.

"Would you rather pay 15 percent or 30-something percent?"

Structure of the deal

Buchanan filed his lawsuit in 2000, claiming that the Ritz developers, Buford and Kevin Daves, had unfairly cut him out of an opportunity to finance the development of the Ritz.

The partners countered that Buchanan was excluded from the deal because he lied about his financial wherewithal.

The two sides battled for months, ultimately accumulating nine volumes of court documents.

In October 2001, Buchanan and the Ritz developers reached a settlement and asked Circuit Judge Nancy Donnellan to take the unusual step of sealing the entire case. Donnellan complied, removing any reference of the lawsuit from the public record.

In the meantime, the Herald-Tribune discovered some details of the settlement from mortgage documents and deeds not sealed by the court.

Buchanan has confirmed the $1.35 million settlement. "That's what they paid me to go away," he said.

Instead of receiving direct payment, Buchanan and the Ritz developers did a series of transactions:

Ritz Carlton co-developer Daves sold unit 1701 in the luxury tower to an entity controlled by co-developer Buford's nephew, Stephen Buford, for $2.368 million on Jan. 14, 2002, a deed filed with the Sarasota County Clerk of Court shows.

Another deed shows that Stephen Buford sold the unit the next day to Buchanan for $5 million.

A third deed, which was also dated Jan. 15, 2002 -- but not executed until Jan. 31, 2003 -- shows that Buchanan ultimately sold the unit to Robert Buford's brother, Daniel Buford, for $6.35 million.

To help pay for the condo, mortgage records dated Jan. 15, 2002, show that Buchanan received a $4.59 million loan from First Union National Bank, which is now Wachovia as a result of a merger.

Buchanan said the loan was made on the basis of an appraisal showing he paid fair market value, but no condo at the Ritz at that time had ever sold for more than $3.1 million. A sale in December 2001 established that price.

"If the developers sold it at $2.368 million, they established a closed price and fair market value for that unit," said Jack McCabe, a real estate analyst and founder of McCabe Research & Consulting in Deerfield Beach. "How an appraiser or lender could justify an immediate resale at more than double the value is curious and demands further evaluation."

Gregg Haarer, the owner of Sarasota's West Shore Appraisal, agreed.

"Where did they come up with that value when there had never been a sale at the Ritz for more than $3.1 million?" Haarer said.

Both McCabe and Haarer, along with two other appraisers and two attorneys contacted by the Herald-Tribune, said appraisers are supposed to determine value by what has closed on the market, not on some projection of future market value.

"The reason that market values have become so artificially inflated in recent years is due to both the level of speculation and these sort of egregious valuations on the part of appraisers," McCabe said.

But Buchanan and Messick countered that the uniqueness of the property is what justified the price.

"It was the best penthouse in the place," Buchanan said. "None of the others had views this one had. It was one of a kind."

Daves, the Ritz co-developer, said during a conversation 10 days ago that unit 1701 is one of the nicest in the building. But he added that 1801, bought by an entity controlled by Stephen Buford for $2.7 million in January 2002, has the same view and is probably nicer.

Nine of the 12 penthouses at the Ritz, including Buchanan's, have 4,900 square feet of living space. The other three are 700 square feet smaller.

Nevertheless, Messick said that the appraiser who valued the property for First Union has an impeccable reputation.

"An appraisal represents a snapshot in time," he said. "This appraisal was completed at a time when people were waiting in line to buy these units."

After receiving his loan from First Union, Buchanan used the penthouse for a year and two weeks. Messick said Buchanan tried to sell it to an outside party for more than the Bufords had offered to buy it back for, but he was unsuccessful.

So on Jan. 31, 2003, Daniel Buford honored his commitment and bought the penthouse for $6.35 million.

Buchanan got his $1.35 million and only had to pay $270,000 in capital gains taxes. That is $264,600 less than he would have had to pay if he declared the settlement as normal income.

"Obviously, there was a tax benefit," Buchanan said. "But we did it because we wanted to use (the unit) for the community. My two partners and I held more than 100 charity events up there."

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