CDDs: Confusing Development Dollars
By: Rene’ Rutan, Real Estate Council Relations Manager, Florida ARECS
If you have been shopping for a new home recently, as I have, you have undoubtedly discovered the Community Development District, or CDD. Many large, multi-phase communities with lifestyle amenities are now relying on this method of funding development, so it is essential that homebuyers and the real estate agents serving them have a full understanding of what CDDs are and how they work.
Chapter 190 of the Florida Statutes defines a CDD as a local unit of special-purpose government that is created as an alternative for managing and financing infrastructure required to support development of a community. Essentially, the goal was to create a mechanism through which the beneficiaries of the new development would bear the burden of growth instead of existing tax payers. The statutes were originally intended for use by municipalities for re-development and economic growth; however, it has been enthusiastically adopted by the private sector.
Prior to the advent of CDDs, a developer would go to their bank and borrow the money sufficient to design the community, obtain required regulatory approvals and construct infrastructure, such as roads, and recreational features like pools and clubhouses. They would build that cost into the price of their lots and then pay down their loan as they sold the lots to builders or homebuyers.
Today, that same developer can use Chapter 190 to create a CDD that borrows the money by issuing bonds and selling them to investors. The bonds are typically paid back over 30 years by the owners of the lots through a CDD Fee collected by the local Tax Collector – in addition to regular ad valorem taxes. The developer does not have to borrow the money to construct the infrastructure, so you can see why they are so popular. Local governments also favor CDDs because they provide more property tax income and a growing tax base without increased government spending.
The benefits to the homebuyer are more unclear. Developers argue they can sell lots for lower prices because they don’t have to include the cost of infrastructure. Perhaps this is true, but in my recent shopping experiences the prices have been comparable to non-CDD communities – and in some cases higher. To be fair, some of those higher prices can certainly be attributed to the clubhouses, soccer fields, pools and walking trails being included in many new developments. CDDs can provide a more reliable source of funding to ensure completion of recreational facilities than traditional funding because developers do not have to wait to make sure they’ve sold enough lots before adding expensive amenities.
That’s not to say that there are no defaults or developer bankruptcies with CDDs. Developers need to maintain sufficient cash reserves to pay the CDD fees on the lots they own until they are sold to builders or homebuyers. The Florida Community Development District Report, published by Income Securities Advisors, which deals with corporate and municipal bond defaults, reports that 168 Florida CDDs have defaulted on $5.1 billion in bonds.
CDDs are complicated entities that add another layer to homeownership, so homebuyers and the real estate agents who represent them should learn as much as possible about communities you are considering. For instance, who are the members of the Board of Supervisors that govern the CDD and how are they operating it? Are they financially sound? You will also want to understand whether the homeowners’ association will own the recreational facilities. In many CDDs, the homebuyers pay for the construction, maintenance and operation of the community facilities through their CDD fees but the developer retains ownership.
CDD communities can deliver a lot of lifestyle amenities popular with today’s homebuyer, but they come at a cost. In one subdivision I recently visited the CDD fee was $3,000 per year for 30 years or $90,000 of additional ownership expense – assuming I own the property for the duration of the bonds. It is incumbent on each buyer to determine if the value proposition works for them. Ask lots of questions and be sure to consider all of the expenses of ownership – sales price, mortgage terms, CDD fees, ad valorem taxes, HOA dues, insurance and ongoing maintenance to make sure the property fits your budget as well as your lifestyle.
This article only highlights a few factors regarding CDDs. If you are considering buying a home in a CDD, hire a real estate attorney to help you understand what you are buying. Visit the Florida ARECS Member Directory to find an attorney in your area.