Don’t confuse Development Districts with Special Tax Districts

By Deborah Goonan, Independent American Communities

For more than four decades, planned communities in the U.S. have funded local neighborhood services through homeowners association (HOA) fees. But in more recent years, state and local governments have turned to various types of tax districts to pay for infrastructure and services in common interest communities.

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This article illustrates, by example, the major differences between Community Development Districts (CDDs) and other types of Special Districts in the state of Florida.

 

Community Development Districts (CDDs)

Under Statute 190, Florida law enables real estate developers to form Community Development Districts (CDDs) to pay for new construction and ongoing maintenance of commonly-owned infrastructure and recreational amenities. The Sunshine State currently has more than 700 CDDs, according to this tabulated list.

Florida home buyers are often uneasy about buying a home that’s part of a CDD, based upon homeowner horror stories like the one recently reported in Bloomberg. It details the ill-fated history of Grand Venezia, a 336-unit condominium complex with a pool, tennis courts, on Tampa Bay.

 

A Ponzi scheme

In 2005, Condo developer Dave Clark promised owners a luxurious Italian-inspired seaside village, to be paid for with nearly $14 million dollars in bonds issued by the developer-controlled Clearwater Cay Community Development District.

Unfortunately, Clark never delivered Venetian gondolas and other waterside perks. He was too busy was running a Ponzi scheme, using fake real real estate sales in Florida and Nevada to defraud investors of $300 million. The U.S. Department of Justice prosecuted Clark in 2016, and sentenced him to 40 years in federal prison.

Of course, the conviction doesn’t really help property owners in the Clearwater Cay CDD. They’re left with an unfinished planned resort community, but they’re still paying annual CDD payments of more than $1,400 to Oppenheimer Funds.

The CDD recently filed for bankruptcy, in hopes of restructuring its debt and drastically reducing homeowner tax burdens. It’s the first time a CDD has filed legal action to dismiss part of its bond debt, claiming the CDD is illegitimate, in light of the developer’s fraud and subsequent conviction.

Will the court consider the CDDs request to discharge part of its bond repayment obligations? Investment corporations will certainly oppose it!

 

CDD fundamental flaw

A CDD is a unit of local government, created for limited purposes of providing services to a planned community. The CDD issues bonds to finance construction and improvements, sets the annual budget, and levies taxes upon its properties to pay for new construction, as well as ongoing maintenance and services.

When the community is still in its planning stages, at the request of a real estate developer, a CDD is established by petition submitted to County Government. After the County approves a CDD, the developer-appoints a 5-member board of supervisors. The the CDD sells bonds to investors, and uses the funds to build roads, stormwater facilities, and other common amenities.

So, even though a CDD is chartered as a governing entity, it’s privately governed for the first 6 to 10 years of new home construction and sales.

The CDD allows a real estate developer to use Other People’s Money to build a new community. Future homeowners within the boundaries of the CDD are obligated to repay bond debt by way of property tax assessments.

In return for their investment, CDD bond buyers hope to earn a healthy return, as the developer sells hundreds to thousands of new homes, and homeowners begin repaying their CDD taxes.

 

What happens if development stalls in a bad economy?

Investors count on guaranteed repayment, with interest, from future property owners. Total bond debt is divided among current property owners. It doesn’t matter to investment companies whether the CDD has 1,000 homes, 100 homes, or 10 homes.

As is the case for Clearwater Cay CDD, if you’re stuck in a district with a few dozen homes repaying millions in bond debt, your CDD fees will be relatively high.

In the CDD game, County government, developers, and investors can and do limit their financial risk at the expense of homeowners.

By the way, it’s wrong to compare a CDD to a city, county, or school board. The latter are real public governments with publicly elected officials. A CDD is a essentially a private-public partnership, with no elected board of supervisors for the first 6 to 10 years.

 

Special Tax Districts

Now you might assume that CDDs and Special Tax Districts are the same thing. But, actually, a CDD is just one type of Special Tax District, that happens to be created without the consent of property owners.

By contrast, sometimes homeowners in cash-poor HOA-governed communities opt to establish a Special Tax District to pay for specific improvement projects or neighborhood services.

It can be a more cost-effective option than hiring a private contractor and repaying a bank-financed loan.

For example, members Sausalito Shores Homeowners Association recently voted in favor of a tax district to repay the city of Casselberry $2.1 million to rebuild a crumbling wall that surrounds their neighborhood. The concrete block wall, built in 1980, is now unsightly and unstable in places.

In this case, of course, the developer is long gone from the community. Sausalito Shores HOA does not have the money to make repairs, and is unable to issue a special assessment for the perimeter wall.

The City of Casselberry agreed to survey homeowners about their desired to establish a tax assessment district to pay for repair of the wall that surrounds their community. According to the Orlando Sentinel, homeowners voted 2 to 1 in favor of paying a $389 annual tax for the next 20 years.

After the City formally approves the Special District at their next meeting, it will begin to repair the wall in September. Tax assessments will begin October 1.

 

More democratic

Before a tax district is approved, the local government provides oversight of a community vote or survey. It’s a more transparent process that prevents election rigging and fraud, two common complaints among members non-profit HOAs.

And compared to a CDD, a Special District approved by survey or vote of homeowners is far more democratic. In essence, a majority of homeowners must agree to tax themselves for specific community improvements or services. ♦

Sources:

A Ponzi Scheme, a Retiree and a Revolt Against Oppenheimer Funds
ByAmanda Albright, Bloomberg
June 10, 2019, 7:30 AM EDT

Residents ask Casselberry to ‘build a wall’ in their neighborhood
By MARTIN E. COMAS | ORLANDO SENTINEL |
JUL 03, 2019 | 11:23 AM