Russ Weyer

September 14, 2009

Florida Community Development Districts Now and in the Future
By G. Russell Weyer, Senior Associate
Fishkind & Associates

For the past two decades, community development districts (CDDs) in Florida have become a favorite financing alternative to banks and private equity due to the availability of bond money at reasonable financing rates (5.5% to 6.5%) and the fact that some of the bond debt could be passed along to the eventual property owners in the form of 30-year annual assessments.   CDDs were used primarily to finance the district’s infrastructure such as roadways, water management, water, sewer, irrigation and offsite mitigation.

 

In all, there are over 500 community development districts in Florida today but that number has dwindled in the past couple of years due to the sharp decline in the national economy in general and the real estate industry in particular.  As of this writing, there are over 50 CDDs in the state that are in some form of default on their bond payments.  And because of the default issue, CDDs are getting a bad reputation from banks and developers alike. 

 

And like the rest of the industries (including land development) in these economic conditions, it’s all in the timing.  The majority of the CDDs currently in default were formed in 2005 and beyond when developers were taking advantage of the real estate boom that took place due to easy financing and investors flooding the market.  The bonds that were issued in these fledgling projects were issued based on assessments that would be collected from the eventual home owners buying in a particular project or by pay downs at closing like a conventional bank construction loan.   The bond issue generally has two years of capitalized interest and one year of debt service reserve built in just in case a development encounters a slow start.  What was not anticipated was the complete demise of the real estate market resulting in many of those projects either being put on hold or developers abandoning them.

 

The result is many of these districts missed the recent May bond payments resulting in a default on the bonds and foreclosure action being taken by the CDD on the land.  In other cases, the interest and debt service reserves were used to make the May bond payment that violates a requirement initially by the bondholders and results in a technical default.   About half of the CDDs currently in default are technical in nature.

 

The actual non-payment of the bonds in May has brought up an interesting dilemma for banks that hold mortgages on properties that have CDDs in place and bonds issued to finance infrastructure.  Since the CDD is a governmental agency, it has the same legal dignity as any other local government and therefore the same lien status.  The CDD is in the first position in front of the bank in terms of lien status on the land.  In all of this economic turmoil, this fact has come to light with the banks even though they agreed to the district formation.  They did not do their homework very well.

 

In this current economic climate, some banks are paying the assessments on properties they have taken back from developers in order to preserve their second lien status and not lose the property overall.  In other cases, they are continuing in the second position as CDDs foreclose on the properties.

 

In cases where the district has been formed but bonds have not been issued, either the developer or the bank are choosing to keep the CDD in place with minimal expense by following the Florida statutes in terms of reporting and holding meetings but are not doing anything else until the market returns.  Banks are also keeping the CDD alive as an alternative to funding the infrastructure when their loan committees deny the infrastructure loan.  Those banks realize the importance of improving their asset.  Finally in some cases the CDD entity is being dissolved.

 

What is the future of CDDs in land development?  They are here to stay for a number of reasons.  First close to 90% of the CDDs in Florida are functioning fine at the moment.  That number may come down some when the next round of bond payments are due in November and again in May.  But the majority will continue to function normally.  CDDs will continue to be a form of alternative financing as banks are not lending at the moment as they continue to work through their holdings. 

 

Finally the bond markets are changing in that many of the former bond holders are leaving the market by selling their bond holdings at a discount and other bond holders are entering the market.  This should cause the rates on the bonds to come down a little and become more affordable in the future.

 

www.fishkind.com

Author Bio

G. Russell Weyer is a senior associate with Fishkind and Associates of Orlando and Naples, an economic, fiscal, and financial consulting firm specializing in real estate and litigation support. His areas of expertise include residential and commercial development management and analysis, real estate amenity management and analysis, public sector fiscal and financial consulting, and analysis and litigation support.

 

As a former commercial and residential real estate developer in Florida, Ohio and Nevada, Mr. Weyer brings an extensive and distinct development point of view to Fishkind and Associates.  He has over 20 years of real estate development experience with large corporations and family-owned companies focused on commercial office, retail, industrial, hospitality, amenity, and residential development. He worked for 13 years at Westinghouse Communities in the communities of Pelican Bay, Pelican Marsh, Pelican Landing and Gateway.

 

Mr. Weyer is an Urban Land Institute (ULI) full member and the immediate past chairman of ULI’s Southwest Florida District Council. He has served on the Collier County Economic Development Council’s Workforce Housing Stimulus Program Committee, the EDC’s Business Park Study Committee and the EDC Committee that is establishing Economic Development Zones in the county. He has also served on the Collier County Community Character/Smart Growth Advisory Committee.

 

Mr. Weyer has been a Florida resident for over 20 years and a Southwest Florida resident for 17 years. He received his master’s degree in business administration from the University of Miami (FL) and his bachelor’s degree from Michigan State University.   He resides in Naples, Florida with Betsy, his wife.

 

 Contact Info:

Fishkind and Associates, Inc.

1415 Panther Lane, Suites 346/347, Naples, FL 34109
Tel: 239-254-8585 - Fax: 239-591-6601 - E-mail: Russw@fishkind.com  - Web Site: WWW.fishkind.com

 

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