Ten years ago, about 8,000 residents lived in The Villages, an active adult retirement community an hour north of Orlando. Attracted by its virtually limitless amenities and idyllic weather, the number of residents today has swelled to more than 80,000, with still more room to grow.
Building The Villages, and many other successful communities across the country – especially in Florida – was made possible in large part by the creation of Community Development Districts (CDDs).
CDDs are special entities that fund roads, water, wastewater plants and other projects necessary to build homes, shops and industry. Created about 50 years ago, CDDs and structures similar to CDDs are used in more than 30 states. They were established in Florida in 1980, and there are now 1,628 special districts in the state, of which 574 are CDDs.
CDDs funded some of Florida’s finest communities
Through CDD vehicles, high yield municipal bond investors have enabled the financing and development of some of the finest master-planned communities in Florida. Without CDDs, communities such as The Villages, Celebration, Reedy Creek and Baldwin Park in Orlando would have been extremely difficult to build and finance.
Recently, a few newspaper articles appeared discussing the financial struggles faced by some communities funded by CDD bonds. They cite a common source – who sells a newsletter on defaulted CDD bonds. Absent, however, is much needed perspective and insight into real estate financing. For more on these stories and misstatements, visit “CDDs: Separating Fact from Fiction“.
Prior to 2007, when the real estate market and the economy in general collapsed, the default rate on CDDs in Florida and other states was extremely low. When the economy faltered, along with the demand for housing, previously planned communities could not be completed, leading to some CDD bond defaults – just as there had been defaults in all real-estate markets. In fact, bond defaults in the commercial mortgage-backed securities and bank-loan markets far surpassed CDD bond defaults.
We are puzzled by the focus of these articles on challenges facing CDD bond projects vs. developments not involving CDD bonds. As everyone knows, the collapse in the real estate market almost brought down our entire financial system and decimated a number of the world’s largest financial institutions.
Infrastructure paid for up front
When funding infrastructure in new communities, there are a number of options. A city or county could pay for it, but it would likely be rejected by existing residents who would bear the costs of these improvements but wouldn’t benefit from them. Alternatively, the developer could add the infrastructure costs to the prices of homes to be built, but that could make the cost of homes too high and put them at a disadvantage with rival housing developments.
CDDs, on the other hand, serve as a vehicle to issue debt to build, and then own, the necessary infrastructure. The bonds are repaid only by residents who directly benefit from the improvements, and by spreading bond payments over many years, subsequent homeowners who will benefit from the roads and wastewater systems also share in paying the cost for the benefits they receive through special assessments included on their tax bills.
CDDs work closely with various governmental entities, including growth management agencies, water management districts and the U.S. Army Corp of Engineers, to ensure that the necessary infrastructure is built both inside and outside the communities. As a result, developers, with the help of CDDs, have invested hundreds of millions of dollars in roads, including extensive off-property thoroughfares to comply with growth management districts across the state.
Without CDDs, these assets would have been built with arguably more expensive commercial bank lending or land bank lending. Either way, the bill carried by residents would likely be larger without CDD financing.
Once they become the voting majority, and pursuant to certain legal provisions, residents manage the CDD, controlling their infrastructure assets, as well as expansion and improvement plans. Additionally, CDDs have successfully refunded debt to give residents a cost savings that they have either pocketed or used to make additional improvements to their communities.
Developments pay their own way
CDDs have proven to be an effective method for developments to pay their own way, as opposed to municipalities and taxpayers at-large, shouldering the burden of public infrastructure improvements.
CDD bonds are secured by a lien on the developer’s property, just like a mortgage loan. Until a home is sold, the developer is responsible for paying the assessments.
As major initiatives are underway to reshape financial markets in the United States, so too are structural and market changes to the issuance of CDD bonds imposed by bond investors and bond underwriters. Investors are requiring developers to put in more equity, develop projects gradually and reduce the amount of bonds issued.
CDDs were not immune to the downturn in the real estate market, but a careful analysis and perspective is required to understand their effectiveness. CDDs help transform housing developments into communities. They help maintain the high levels of public services expected by residents – paid for by self-imposed fees and assessments – and ensure local control. They have been integral to the growth of states, particularly Florida, and have spurred the creation of the most creative, amenity-laden communities in the country. That’s why Celebration, and other similar communities, have become so popular.