@Chuck Masters: you asked for it........
Let’s test our love for real estate. I’m willing to put together this article about taxing districts so I know I love real estate. You’re well on your way if you can make it to the end of this gripping story about………real estate taxes.
A CDD (Community Development District) is a quasi-governmental body that operates as a special taxing district. The district operates similar to a homeowners association where a board of directors is appointed to manage the district’s business.
The CDD is created by legislative action and has jurisdiction over a defined geographic area. At a predetermined time, appointed board members are replaced with new board members who are voted to the board by residents inside the CDD’s jurisdiction.
CDD’s were born early in Florida’s history as the state government began to manage water resources across the state. The state wanted to build canals, lakes, roads and other infrastructure to manage water needs across the state. The state created water management districts (WMD’s) to coordinate all of these efforts.
The state and affected landowners needed to resolve issues related to land rights and the financing of these projects. Special taxing districts (CDD’s) were created through a legislative process to manage various engineering projects throughout the years.
Affected landowners appointed board members to run the affairs of the district or the specific infrastructure project being built. The district created a financing mechanism where the landowner controlled the work scope and budget for a specific project and financed the project by issuing bonds to pay for the project. The bonds were financed over a 30-year period and repaid via a non-ad valorem tax that was assessed against the land parcels that were inside the boundaries of the district.
The Florida legislature created the Uniform Community Development Act (Chapter 190) in the Florida statutes in the early 1980’s. Its purpose was to establish uniform and fair procedures to operate the districts. CDD’s then became a prevalent tool for land developers who began building larger and larger communities throughout Florida to accommodate the state’s growing population. There were about 600 districts in Florida as of 2012.
Community development has transformed from agricultural needs in the 1800’s through the 1900’s to today. CDD’s are mostly used by developers today to build large, highly-amenitized master planned communities to satisfy modern lifestyles.
Let’s see how CDD’s typically work today.
Let’s say we want to build a small community with 100 to 200 homes and a small pool/cabana area. We use equity and debt (A&D loans) to purchase land, pay soft costs for zoning/entitlements, site plan design and engineering plus hard costs for mass grading, installing underground utilities, retention ponds, streets, curb and gutter, etc. Then we get more equity and debt (Builder Line of Credit) for soft costs to design buildings, get permits, pay impact fees for police, fire, schools; and hard costs for the houses (sticks and bricks).
A small development company or homebuilder can do this kind of deal. We invest the money, build the community slowly, sell to homeowners, build the pool/cabana later when the project is cash flowing and make a profit if we’re good at what we do.
Let’s up the stakes and build 600 homes with a 10,000 square foot clubhouse, a huge pool, maybe a golf course. Same exercise but bigger dollars. Now we need a bigger company so we get a large Wall Street firm to land-bank the property and a big national builder to build the community with public debt and equity. We phase the project, put in some roads and houses, make some sales, get some cash flow and build the amenities later in the project.
Let’s up the stakes a bit more. Let’s do 2,000 houses with a couple of golf courses, a marina, a town center, an apartment complex or two and some retail. We know buyers won’t want to wait years for the amenities to be finished. We want to build all the fun stuff first and make money later anticipating that buyers see all the goodies and line up to buy houses from us.
Now we do a CDD. We setup a district via County or State legislation depending on the size of the community and if it crosses county lines. We set a budget for all the soft costs and hard costs to build the goodies. The developer and homebuilder appoint smart people to sit on a board and manage the project. The company buys the property where it will build (100’s or 1,000’s of acres), sets the boundaries, gets a site plan approved and establishes how many houses, etc that it will build. Now we know how many residents we’ll have.
We go to a company to get public financing, municipal bonds, to finance all the underground utilities, streets and amenities. The bonds are issued and sold on the public market. The cash goes to the developer and builder to fund its construction as outlined in its budget.
The CDD board runs the project and assesses a non ad-valorem tax to each piece of property inside the new community to recover the money from future homebuyers. The assessment is put in place for 30 years, assessed to each property, put on the tax rolls and collected by the County tax collector on behalf of the developer, the builder and the bondholders. The county collects the taxes and passes it through to the CDD who then pays the bondholders. Just like you pay your mortgage on an amortization schedule.
Here's where it's really powerful. The non-ad valorem CDD assessment is co-equal to your typical real estate taxes. The assessments are superior to HOA assessments (yes, HOA's still exist inside CDD's) and superior to first mortgages (bank financing). The CDD assessments run with the land so anyone moving in to the neighborhood needs to understand that their RE tax bill is usually higher than other non-CDD communities because there's an extra non-ad valorem assessment.
The upside is that a homeowner can move into a new neighborhood with all the streets installed and very attractive amenities. Think of all the golf courses at The Villages. Imagine a yacht club and marina, or a 20,000 square foot clubhouse. How about a town center with restaurants, ice cream shops and a movie theatre like Disney’s Celebration?
There are lots of other interesting things to talk about like the difference between long term “A-bonds” used for the land development compared to short term “B-bonds” used for construction of houses. There are a bunch of wild things that happened to districts and bondholders and builders and homeowners during the crash in 2008. The crash affected all of these folks plus created turmoil on Wall Street.
Various versions of CDD’s have been used in many other states over the years. There was something like 20,000 districts across the country as of 2002. The number is lower now after many became insolvent during the crash of 2008.
But in its simplest form, CDD's exist in a similar way to HOA's and create features and benefits or pros and cons for homeowners and homebuyers to consider when comparing one neighborhood to another.
Happy hunting.
