CDD Is Not A Four Letter Word

CDD is not a four letter word.

Never have I seen such polarization among homebuyers as when these three letters are used in conjunction with housing developments.  However, we are getting ahead of ourselves.  First, let’s take a moment to describe what these letters represent.

Community Development District.  At least that is what they are called in Florida. Mello-Roos CFD, MUD, there are different names for these types of municipal financing districts in different states throughout the country.

A CDD is a financing mechanism where a developer can float debt to help pay for certain community infrastructure improvements.  That debt, in turn, becomes a lien on each homesite, effectively passing along the cost of that infrastructure to the future homeowners who will be paying down that debt over time – usually about 20 years.  The improvements paid for with the CDD debt are then managed through a quasi-governmental process that is very transparent to homeowners through public meetings, with ever increasing homeowner participation on the CDD boards.  In a nutshell, general community expenses that would otherwise be managed through an HOA (Home Owner’s Association), would instead be managed through a CDD. 

So, is a CDD a good or a bad thing?  Well, it can be both (how is that for straddling the fence?).  When done in a fiscally responsible manner, CDDs can be very good for a community.  Some of the benefits are as follows:

·         Enhanced infrastructure – more landscaping, better streetscapes, entry features, etc.

·         Greater community amenities.

·         Improved financial transparency to homeowners.

 

Potential pitfalls tend to be financial in nature:

·         Increased yearly homeowner expenses due to debt service.

·         Developer bond default in poor economic times.

 

Let’s look at these individually, and simply.  As with any business, real estate development only works if the returns justify the expense.  By using CDD financing to allocate debt to the lots, a developer can provide better infrastructure to a community than if they had to bear the cost 100% themselves.  In turn, this typically results in a more upscale development that would command higher price points and a more sophisticated community lifestyle environment that if those dollars were not spent on the community.  Though the homeowners bear some of the burden of these costs through the allocated debt service, they are receiving homes with higher values and an improved lifestyle experience.  Furthermore, as a CDD is a quasi-governmental entity, financial transparency as to the CDD expenses and management is very strong.  Basically, everyone should experience a win-win.

When it goes bad, it becomes a financial burden on everyone.  If the development fails, the CDD operating expense burden for the community may fall upon the shoulders of the existing homeowners, either requiring them to step up monthly expenses, or allow common elements to be shuttered or fall into disrepair.  Now, you may be saying to yourself, “How is this any different than if a developer goes bust without a CDD.  The homeowners still need to shoulder the burden, don’t they?”  I will keep the answer simple and straddle the fence again.  The answer is, “kind of yes”.  With no CDD, if a developer goes under, the bank takes over and assumes developer obligations.  Usually, that means that the bank would then be responsible for the shortfall obligation in community expenses.  It does not mean that they won’t scale back expenses, but it does not obligate the remaining homeowners to carry a shortfall expense.  Also, after a property is foreclosed upon, the bank will most likely have written down the asset to market value and look to sell the property to recoup whatever portion of the original investment they can.  With a CDD, bondholders typically have a longer time horizon and are not so quick to either foreclose out their asset or move quickly to sell their bonds at a loss.  You may see a CDD community remain stagnant for a longer period of time as the bondholders are more apt to try to ride out a downturn than a bank.

OK, you may still be confused.  I get that.  You are not alone.  Now, let me make it real simple.  When times go bad and a developer goes under, it stinks for everyone, whether or not there is a CDD.  When times are good, the birds sing, the grass is green and everyone is happy.  Homeowners will just end up paying probably between $500 - $1,500/year more due to the CDD debt service, but will receive improved community benefits in return.  See, simple.

So, the next time you see one community touting itself as a non-CDD community to sell against a community that has a CDD, don’t let yourself get confused.  You should compare the communities on their own housing and common area merits.  If the CDD community seems better executed, then the bond funds were probably well spent to justify the extra expenses.  If you feel there is no difference between the communities, then you may want to consider the non-CDD community and save yourself some yearly bond debt carry.

If the community, regardless of whether or not it has CDD debt, appears in disrepair, the grass is brown and there is a good deal of areas fenced off with chain link with high degrees of neglect, then run for the hills. 

Until next time…

 

Keep kicking the dirt.