What Are Community Development Districts (“CDDs”) and How Do They Work?
By: Rene’ Rutan, REC Relations Manager, Florida ARECS
If you have been shopping for a new home recently, as I have, or working with a buyer who is, you have undoubtedly encountered 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 which 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 a new community, obtain required regulatory approvals and construct infrastructure such as roads and recreational features like pools and clubhouses. They would build those costs 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 Community Development District, which is a quasi-governmental entity that borrows the money by issuing bonds and selling them to investors. The CDD then uses the money raised through bond sales to fund the construction of the infrastructure and amenities. 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 CDD bonds are typically paid back over 20-30 years by the owners of the lots through a CDD Fee collected by the local Tax Collector - in addition to regular ad valorem taxes. Like other debt, CDD fees include principal and interest and they can be prepaid to reduce the cost of interest that would accrue over the full amortization period. It’s important to know that the fees for some CDD’s include a portion that is not debt but is instead intended for the ongoing cost of maintaining community amenities. That portion of the CDD fee is not pre-payable, can decrease or increase, and is due and payable in perpetuity unless eliminated by the CDD Board of Supervisors.
The benefits to the homebuyer are 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. In fact many CDD communities finalize construction of their clubhouses and pools before they’ve sold the first home which can be comforting for early buyers.
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 of complexity and cost 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? Boards of Supervisors are elected by the residents of the CDD just like a City Council or Commission. Is the CDD financially sound? CDD’s are required by law to provide a website with details on the operation of the CDD including information like meeting minutes and budgets so encourage your Buyers to review them.
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. Encourage your clients 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 their budget as well as their lifestyle. They will thank you for it.
Rene’ Rutan is the Real Estate Council Relations Manager with Attorneys’ Real Estate Councils of Florida, Inc. (“Florida ARECS”) and has over thirty years’ experience in the real estate industry.