The Orlando Sentinel recently published a few articles on Community Development Districts (CDDs) and financial challenges facing some of them. These articles, along with a recent article in the Fort Myers News-Press, cite a common source – who sells a newsletter on defaulted CDD bonds. Missing from these stories is much needed perspective and insight into real estate financing, and they contain a number of misstatements that we would like to correct.
For more on CDDs and how they work, visit, “Why CDDs?
Orlando Sentinel, Aug. 22, 2010: “Thanks to the greedy way Blair Communities financed the project, retirees who live on about 235 of the lots are now stuck with $15.9 million in bond debt.”
In fact, the 235 residents are only responsible for an annual assessment of approximately $1,000 per year on the homes they own. The residents are not responsible for the bonds on developer- owned land that was not repaid. CDD bonds are not cross collateralized or cross defaulted by land parcels or homes. Each homeowner in a CDD is assigned an allocation of $500 to $2,000 per year, depending on the type of unit, just like an ad valorem tax. This assessment is paid through the tax bill. The homeowner does not have any legal responsibility beyond his or her allocation, just as a homeowner is not responsible for someone else’s tax bill in a community if another resident does not pay.
Orlando Sentinel, Aug. 22, 2010: The article cites Arlington Ridge and its CDD, which is facing financial hardship.
In fact, the CDD in both the Arlington Ridge and Blair communities did not cause the problem. They did not build out as planned due to the market downturn. If the CDD did not fund the infrastructure, then a bank would have funded the infrastructure and the bank would be the entity foreclosing on the developer-owned land, not the CDD. In any event the residents would be in the exact same position, with or without a CDD.
Orlando Sentinel, Aug. 22, 2010: “Across Florida, retirees are watching their communities crumble and their carefree lifestyles vanish as they become saddled with bonds and other debts bequeathed to them by dying developers.” And, “The defaults are leaving folks … to uproot their retirement and fend for themselves in a morass of complicated government finance involving these-so called ‘dirty bonds.’”
In fact, these assertions make no sense. The real estate crisis was not caused by CDDs. It was caused by irresponsible lenders and by individuals who borrowed money to buy or refinance homes they could not afford. Communities were planned in response to this false demand. Developers used both bank loans and CDD bonds to finance the infrastructure for these communities in response to public demand for housing. Developers did not risk millions of their own dollars just to issue bonds. The bonds were issued as a response to the demand for housing. Unfortunately, the housing market collapsed and, in turn, the need evaporated for the land and lots securing the bonds.
Orlando Sentinel, Aug. 22, 2010: “Nearly always, it’s because of a funky form of government called community development districts, a gift in 1980 from the Legislature to developers, guaranteeing them fantastic profits without risk. Never mind the retirees. Let the dopey New Yorkers fend for themselves.”
Orlando Sentinel, Aug. 25, 2010: “These ‘governments’ called community development districts are nothing but a money-making arm of the developer.”
In fact, CDDs exist in about 30 states. They have proven to be an effective way for developments to pay their own way, as opposed to municipalities and taxpayers at-large shouldering the burden of public infrastructure improvements. Bonds that are issued are used to install public infrastructure and the bonds are secured by a lien on the developer’s property, just like a mortgage loan. If the property is not sold, the developer is responsible for paying the assessments.
The Legislature, through the CDD statute, in no way guarantees developers “fantastic profits without risk.” The CDD is not a “money-making arm of the developer.” In fact, real estate land development is a risky enterprise, and virtually every developer in the country will tell you fantastic profits were not made the last decade. Anything that was made was later lost. The number of personal and developer bankruptcies as a result of the financial crisis is unprecedented.
Orlando Sentinel, Aug. 25, 2010: “If developers did it the old-fashioned way – by paying for infrastructure up front – residents wouldn’t be paying twice for infrastructure and would fare better in a down market.”
In fact, what the articles state are exactly what CDDs do – they install infrastructure up front. In many of the communities cited, much of the infrastructure is in place. The problem is there is no demand for the lots and homes, so these communities are not building out. If the projects were financed by a bank, it is very likely a fraction of the infrastructure would have been installed and the residents would be much worse off.
As far as residents “paying twice for infrastructure and would fare better in a down market,” residents do not pay twice for infrastructure when they purchase a home in a CDD community. And why would residents fare better in a down market without a CDD? In most cases, only a fraction of the infrastructure would be installed without a CDD. In many cases, the FDIC, as successor to a lender, would be the landowner in a failed community. We fail to see how that would be a better result.
Orlando Sentinel, Aug. 22, 2010: Referring to Arlington Ridge, “In this case, Oppenheimer funds bought the whole bond issue,” and the article snidely asks, “Anybody out there have Oppenheimer funds in a retirement portfolio?”
In fact, CDD bonds are held in a high yield tax-free bond fund managed by Oppenheimer funds as well as other prominent mutual fund families. In regard to Oppenheimer funds, the CDD bonds make up a portion of a diversified portfolio of bonds. The fund that owns the bonds is one of the best performing funds over the last 12 months. The fund pays an annual tax-free yield of approximately 6%.
Orlando Sentinel, Aug. 25, 2010: “Pine Island Community Development District has had to dip into its reserve account to pay bondholders on its $22.8 million debt because the developer, Ginn-LA Pine Island LLP, hasn’t paid its assessments. Nuveen Asset Management is the bondholder for $12.1 million; Goldman-Sachs, $7.5 million; VanKampen Asset Management, $3.3, and Blackrock Advisors, less than $1 million.
In fact, Pine Island has never had to dip into its reserve account to pay bondholders on it’s $22.8 million special assessment bond (cusip# 722618AA3). The developer paid his share of assessments in full this year, and the entire year’s worth of debt service – including the November 2010 payment – has already been collected. While only a dozen or so homes have been constructed, the developer has successfully sold approximately 95% of the lots to end users.
Fort Myers News-Press, Aug. 8, 2010: “…The Quarry in North Naples where there’s a $219.2 million dirt bond in default on its interest payments….”
In fact, the developer-builder in the Quarry CDD is Pulte Homes. Pulte has not missed one interest payment and continues to pay down outstanding bonds.
Orlando Sentinel, Aug. 29, 2010: “In subdivisions without districts that issue bonds, buyers pay for the infrastructure in the price of the house. In those with districts [such as The Villages], they do, too. But in addition, they pay a second time for that infrastructure – with interest – as they pay off the bonds, which often add an extra $20,000 to the price of a house.”
By suggesting that people are duped into paying more for comparable homes than could be purchased for less in a community where a CDD is not involved in the financing, the author must think the homebuyers she is seemingly trying to champion are not too intelligent.
Now who’s implying these are “dopey New Yorkers”?
We believe that very few people purchase a home without careful comparison shopping. If homeowners are paying more for less, why do they continue to flock to The Villages, as acknowledged in her article? Very simply, they are drawn by the amenities, facilities and lifestyle offered in these CDD-financed communities.
None of the articles cited above include comments from the mutual funds that were maligned, and we know from our 30-plus years in the industry that these funds are managed by highly skilled bond managers who are supported by the best credit analysts in the industry.
Although we always appreciate media attention on the municipal bond market, we think it’s incumbent upon reporters and columnists to check their facts carefully and seek out sources with different perspectives. In this case, there is a danger that investors might draw the conclusion that all CDDs should be painted with the same brush. Clearly this is not the case.