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Special districts may make Florida leader in bond defaults

March 05, 2010 By: Mike Seemuth

Special tax districts in Florida that stopped repaying their debts may emerge as the nation’s biggest source of municipal bond defaults.

More than 100 community development districts, or CDDs, across the state have defaulted on a mountain of municipal bond debt and more defaults are likely, said Richard Lehmann, a Miami Lakes-based newsletter publisher and registered investment adviser.

In a study of community development districts that Lehmann prepared for the state’s auditor general, he reported that Florida CDD defaults represent “the single biggest default wave” involving municipal bonds in the past 30 years.

A community development district is a special-purpose unit of local government. Private developers who obtained the CDD designation for their land holdings qualified for tax-exempt municipal bond financing, which is cheaper than loans that yield interest subject to income tax.

Developers typically have used the proceeds of CDD bond issues to build streets, sewers and other infrastructure to support a residential community. Responsibility for repaying CDD bonds is supposed to shift gradually from the developers to home buyers. But many of these districts defaulted because they attracted too few buyers of homes and home sites.

Florida has about 600 of these special tax districts, and if Lehmann’s numbers are correct, about one in three has defaulted or may do so. Lehmann says 122 community development districts in Florida have defaulted on almost $3 billion of bonds. He estimates that another 78 CDDs could default on $1 billion. Many of these bonds were issued in 2005 and 2006, when the housing market was still booming.

In South Florida alone, community development districts have defaulted on bond debts totaling about $400 million, and 15 others have nearly defaulted on another $300 million. By dollar volume, the largest municipal bond defaults involving CDDs in South Florida include $49.1 million borrowed by the East Homestead Community Development District, $71.5 million borrowed by the Landmark at Doral Community Development District, and $129.3 million borrowed by the Monterra Community Development District, located in Broward County.

“This thing has been swept under the carpet for months now, over a year, basically because opposing it would hurt sales more than they already have been hurt,” said Lehmann. He has forwarded his findings to the state auditor general David W. Martin, who is scheduled to deliver a report on CDD defaults to the Florida Legislature on Monday.

Lehmann said the Legislature could improve the creditworthiness of community development districts by creating a state board to oversee their bond issuance and by requiring developers to invest more of their own money in the districts.