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Hole in dirt bonds to deepen as losses, defaults mount

Friday, December 5, 2008 |
Modified: Wednesday, December 10, 2008

Hole in dirt bonds to deepen as losses, defaults mount Sidelined community development districts create bleak scenario Tampa Bay Business Journal - by Janet Leiser Staff Writer Media TAMPA Banks that loaned hundreds of millions of dollars to developers to buy high-priced land in the Sunshine State might end up with worthless mortgages as the number of municipal bond defaults rises. First mortgages, it turns out, aren t always first. They re second in line when community development districts sell tax-exempt revenue bonds to pay for infrastructure, including underground utilities, roads, parks and other amenities. And when the market value of an unfinished residential or commercial development falls below what s owed on bonds, there s nothing left for the lender. Banks can t foreclose out and eliminate the interest of the district, said Tampa lawyer Mark Straley. We re ahead of the bank. In today s depressed market, Tampa Bay area real estate veterans contend much of the land tied to CDDs issued in the past few years won t sell for enough to cover the so-called dirt bonds, let alone the mortgage. Working through the effects of dropping land values and the impact on the bond and financial services market is one of the next big hurdles for the commercial real estate industry in Florida and other formerly high-growth states. The fact that CDDs are going into default, it s part of the entire financial market recalibrating, said Tim Chapin, an associate professor in the Department of Urban and Regional Planning at Florida State University. It s another layer. Municipal bond defaults are expected to rise significantly, said Richard Lehmann, publisher of the Distressed Debt Securities newsletter based in Miami. While $6 trillion in municipal securities were sold between 1980 and 2007, historically defaults have been low, less than 1 percent over the past 27 years, Lehmann said. Ten of Florida s 24 CDD defaults this year involve developments on Florida s West Coast, Lehmann said. This is unprecedented, Straley said. It s a reflection of what s going on in the real estate market. It s part of the overall downturn. Straley & Robin, a boutique firm specializing in CDDs, has six default lawsuits pending and will soon file another six. Prager Sealy & Co. is the underwriter for many of the local CDD bond issues. An employee who answered the telephone at Prager Sealy s Orlando office politely said the firm doesn t talk to the media. An essential ingredient missing The CDD financial model s success is dependent on growth, said Chapin. The expectation is that the housing market will continue and developers will turn over property, Chapin said. When growth doesn t happen, CDDs are unsustainable. Such a bleak scenario seemed unlikely a few years ago as real estate sold for record setting prices. Lucky or apt investors made millions within months as they flipped land to developers or national homebuilders hungry to profit from Florida s building boom.

Today s recessionary environment, credit crunch and falling property values paint a disparate scene. Developers with depleted bank accounts, canceled credit lines and ballooning loans are struggling to stay afloat. There are instances where property owners hit with foreclosure haven t fought back. While private equity funds are being established to grab distressed property, the funds are waiting for prices to dip more. Buyers with cash to spend on land are in short supply. Under water New Port Tampa Bay was the vision of longtime developer Ed Oelschlaeger who built successful, upscale condominium projects from Marco Island to Tampa for more than 20 years. Oelschlaeger had grand plans for 50 acres near the Gandy Bridge in South Tampa, not far from his home. He envisioned a ritzy waterfront village with condos starting at $400,000. There d be townhomes, a grocery store, shops, restaurants, a resort and marina. The developer paid dearly for his dream more than $1 million an acre. Investors Grady Pridgen and Carl Lindell had owned the property for about a year prior to selling it to Oelschlaeger in 2005. They made millions. It s a great piece of property, Lindell said. We were lucky to sell before things got very bad. Oelschlaeger had the financial backing of Tampa businessmen including Lance Ringhaver, founder of a Caterpillar dealership, Andrew Krusen Jr. and Don Niederpruem. The businessmen and others provided $35.8 million as equity. Bank of America loaned $69 million. Today, Oelschlaeger s dream is no more than an artist s rendering. EcoGroup Inc. owes $154.8 million on the development that doesn t boast a single building. The BofA first mortgage has been in foreclosure since May. Longtime Tampa area property appraiser Lee Pallardy is among observers who don t expect the land to bring more than the New Port Community Development District bonds of $50 million. A Tampa commercial real estate broker is less optimistic he expects the property to sell for roughly $25 million. Lindell, who owned automobile dealerships for years prior to becoming a developer, believes the property is worth more at least as much as $50 million. In a show of confidence, he bought some of the bonds, less than $10 million worth, earlier this year at a discount. The majority of the bonds are owned by Oppenheimer & Co. Inc. through its funds. Districts defined Florida has many special taxing districts set up under state law and subject to the public records rules. They include 480 community development districts or CDDs. There are 64 in Hillsborough County, 40 in Pasco County and three in densely populated Pinellas County. Approved by municipalities, the CDDs are started and managed by developers. The mini-governments issue tax-exempt bonds as a way to pay for costly infrastructure. As envisioned, once buildings or homes are built in the district, those property owners pay an annual assessment in addition to property taxes over as many as 30 years to pay off the bonds.
jleiser@bizjournals.com | 813.342.2468